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Regulating Systemic Risk


  • Kawai, Masahiro

    (Asian Development Bank Institute)

  • Pomerleano, Michael

    (Asian Development Bank Institute)


The failure to spot emerging systemic risk and prevent the current global financial crisis warrants a reexamination of the approach taken so far to crisis prevention. The paper argues that financial crises can be prevented, as they build up over time due to policy mistakes and eventually erupt in "slow motion." While one cannot predict the precise timing of crises, one can avert them by identifying and dealing with sources of instability. For this purpose, policymakers need to strengthen top-down macroprudential supervision, complemented by bottom-up microprudential supervision. The paper explores such a strategy and the institutional setting required to implement it at the national level. Given that the recent regulatory reforms that have been undertaken to address systemic risks are inadequate to prevent and combat future crises, the paper argues that national measures to promote financial stability are crucial and that the Westphalian principles governing international financial oversight should be rejected. The paper proposes that while an effective national systemic regulator should be established, strong international cooperation is indispensable for financial stability.

Suggested Citation

  • Kawai, Masahiro & Pomerleano, Michael, 2010. "Regulating Systemic Risk," ADBI Working Papers 189, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0189

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    References listed on IDEAS

    1. Jeffrey Carmichael & Michael Pomerleano, 2002. "The Development and Regulation of Non-Bank Financial Institutions," World Bank Publications, The World Bank, number 15236.
    2. Masahiro Kawai, 2005. "Reform of the Japanese banking system," International Economics and Economic Policy, Springer, vol. 2(4), pages 307-335, December.
    3. Kawai, Masahiro, 2000. "The resolution of the East Asian crisis: financial and corporate sector restructuring," Journal of Asian Economics, Elsevier, vol. 11(2), pages 133-168.
    4. Claudio Borio & Ilhyock Shim, 2007. "What can (macro-)prudential policy do to support monetary policy?," BIS Working Papers 242, Bank for International Settlements.
    5. Martin Èihák & Richard Podpiera, 2006. "Is One Watchdog Better than Three? International Experience with Integrated Financial-Sector Supervision (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(3-4), pages 102-126, March.
    6. Jerry H Tempelman, 2009. "Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 44(3), pages 182-183, July.
    7. Martin Cihak & Richard Podpiera, 2006. "Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision," IMF Working Papers 06/57, International Monetary Fund.
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    Cited by:

    1. Dragan Miodrag Momirovic, 2012. "New Architecture Of Global Financial Supervision-Macroprudential Oversight," EuroEconomica, Danubius University of Galati, issue 2(31), pages 88-107, May.

    More about this item


    global financial crisis; systemic risk; macroprudential supervision; systemic stability regulation; regulating systemic risk;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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