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Black Swans and Financial Stability: A Framework for Building Resilience

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Abstract

This article refines the concept of black swans, typically described as highly unlikely and catastrophic events, by clearly distinguishing between knowable and unknowable events. By emphasizing that black swans are “unknown unknowns,” the article highlights that the realization of new black swans cannot be prevented and motivates a need for policies that build the financial system's resilience to unforeseeable crises. The article introduces a "resilience principle" that calls for policies that are adaptable, universal, and systemic. Examples are provided of policies with these features, none of which relies on the official sector being better positioned than the private sector to anticipate the unknown.

Suggested Citation

  • Daniel Barth & Stacey L. Schreft, 2025. "Black Swans and Financial Stability: A Framework for Building Resilience," Finance and Economics Discussion Series 2025-043, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-43
    DOI: 10.17016/FEDS.2025.043
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    References listed on IDEAS

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    1. Thornton, M. K. & Thornton, R. L., 1990. "The Financial Crisis of A. D. 33: A Keynesian Depression?," The Journal of Economic History, Cambridge University Press, vol. 50(03), pages 655-662, September.
    2. Tomasz Piskorski & Amit Seru & James Witkin, 2015. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market," Journal of Finance, American Finance Association, vol. 70(6), pages 2635-2678, December.
    3. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, June.
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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