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Taming SIFIs

We model a Systemically Important Financial Institution (SIFI) that is too big (or too interconnected) to fail. Without credible regulation and strong supervision, the shareholders of this institution might deliberately let its managers take excessive risk. We propose a solution to this problem, showing how insurance against systemic shocks can be provided without generating moral hazard. The solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a Systemic Risk Authority endowed with special resolution powers, including the control of bankers' compensation packages during crisis periods.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/1328.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1328.

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Date of creation: Jun 2012
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Handle: RePEc:upf:upfgen:1328
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Bruno Biais & Thomas Mariotti & Guillaume Plantin & Jean-Charles Rochet, 2007. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 345-390.
  2. Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, 01.
  3. Narayana R Kocherlakota & Ilhyock Shim, 2005. "Forbearance and Prompt Corrective Action," Levine's Bibliography 784828000000000512, UCLA Department of Economics.
  4. J. Thomas & T. Worrall, 2010. "Income Fluctuations and Asymmetric Information: An Example of the Repeated Principal Agent Problem," Levine's Working Paper Archive 2077, David K. Levine.
  5. Ilhyock Shim, 2006. "Dynamic prudential regulation: Is prompt corrective action optimal?," BIS Working Papers 206, Bank for International Settlements.
  6. Ing-Haw Cheng & Harrison Hong & Jose A. Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Working Papers 16176, National Bureau of Economic Research, Inc.
  7. John, Kose & Mehran, Hamid & Qian, Yiming, 2010. "Outside monitoring and CEO compensation in the banking industry," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 383-399, September.
  8. Guillaume Plantin & Bruno Biais & Thomas Mariotti & Jean-Charles Rochet, 2004. "Dynamic Security Design," GSIA Working Papers 2005-E5, Carnegie Mellon University, Tepper School of Business.
  9. repec:bla:restud:v:74:y:2007:i:2:p:345-390 is not listed on IDEAS
  10. Völz, Manja & Wedow, Michael, 2009. "Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market," Discussion Paper Series 2: Banking and Financial Studies 2009,06, Deutsche Bundesbank, Research Centre.
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