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Why Prudential Regulation Will Fail to Prevent Financial Crises. A Legal Approach

  • Marcelo Madureira Prates
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    In this paper, we suggest that the regulation of the financial system, especially if the aim is to prevent financial crises, should be focused on dealing with the consequences of the crises, not on trying to avoid their causes, although it may seem counterintuitive at first sight. Contrary to the majority of opinions in the field, we firmly believe that more important than organizing the best possible prudential regulation is having a solid and well-developed financial safety net. Building a strong safety net might not only boost confidence in the financial system and contribute to its stability, but also create the right incentives to avoid reckless risk-taking, mainly if there are rules establishing that other financial institutions, creditors and even executives could be held responsible for the trouble caused by any failed financial institution

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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps335.pdf
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    Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 335.

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    Date of creation: Nov 2013
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    Handle: RePEc:bcb:wpaper:335
    Contact details of provider: Web page: http://www.bcb.gov.br/?english

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    1. World Bank, 2012. "Global Financial Development Report 2013 : Rethinking the Role of the State in Finance," World Bank Publications, The World Bank, number 11848, September.
    2. James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," UMASS Amherst Economics Working Papers 2008-14, University of Massachusetts Amherst, Department of Economics.
    3. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund," CEPS Papers 6918, Centre for European Policy Studies.
    4. Julia Black, 2002. "Critical reflections on regulation," LSE Research Online Documents on Economics 35985, London School of Economics and Political Science, LSE Library.
    5. Charles Goodhart, 2008. "The Regulatory Response to the Financial Crisis," FMG Special Papers sp177, Financial Markets Group.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, March.
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