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The Interplay Among Financial Regulations, Resilience, and Growth

Author

Listed:
  • Franklin Allen

    (Federal Reserve Bank of Philadelphia
    University of California Berkeley
    Imperial College London
    University of Pennsylvania)

  • Itay Goldstein
  • Julapa Jagtiani

Abstract

Interconnectedness has been an important source of market failures, leading to the recent financial crisis. Large financial institutions tend to have similar exposures and thus exert externalities on each other through various mechanisms. Regulators have responded by putting more regulations in place with many layers of regulatory complexity, leading to ambiguity and market manipulation. Mispricing risk in complex models and arbitrage opportunities through regulatory loopholes have provided incentives for certain activities to become more concentrated in regulated entities and for other activities to move into new areas in the shadow banking system. How can we design an effective regulatory framework that would perfectly rule out bank runs and TBTF (too big to fail) and to do so without introducing incentives for financial firms to take excessive risk? It is important for financial regulations to be coordinated across regulatory entities and jurisdictions and for financial regulations to be forward looking, rather than aiming to address problems of the past.

Suggested Citation

  • Franklin Allen & Itay Goldstein & Julapa Jagtiani, 2018. "The Interplay Among Financial Regulations, Resilience, and Growth," Working Papers 18-9, Federal Reserve Bank of Philadelphia, revised 16 Feb 2018.
  • Handle: RePEc:fip:fedpwp:18-9
    DOI: 10.21799/frbp.wp.2018.09
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    References listed on IDEAS

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    More about this item

    Keywords

    living wills; interconnectedness; too big to fail; financial stability; liquidity regulations; Dodd–Frank Wall Street Reform and Consumer Protection Act; capital regulations; financial reform;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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