Systemic Risk and Optimal Regulatory Architecture

By Marco A Espinosa-Vega, Rafael Matta, Charles M. Kahn, Juan Sole

August 1, 2011

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Format: Chicago

Marco A Espinosa-Vega, Rafael Matta, Charles M. Kahn, and Juan Sole. Systemic Risk and Optimal Regulatory Architecture, (USA: International Monetary Fund, 2011) accessed December 4, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Until the recent financial crisis, the safety and soundness of financial institutions was assessed from the perspective of the individual institution. The financial crisis highlighted the need to take systemic externalities seriously when rethinking prudential oversight and the regulatory architecture. Current financial reform legislation worldwide reflects this intent. However, these reforms have overlooked the need to also consider regulatory agencies' forbearance and information sharing incentives. In a political economy model that explicitly accounts for systemic connectedness, and regulators' incentives, we show that under an expanded mandate to explicitly oversee systemic risk, regulators would be more forbearing towards systemically important institutions. We also show that when some regulators have access to information regarding an institutions' degree of systemic importance, these regulators may have little incentive to gather and share it with other regulators. These findings suggest that (and we show conditions under which) a unified regulatory arrangement can reduce the degree of systemic risk vis-á-vis a multiple regulatory arrangement.

Subject: Asset and liability management, Asset valuation, Banking, Distressed institutions, Financial crises, Financial institutions, Financial sector policy and analysis, Lender of last resort, Liquidity, Systemic risk, Tax incentives

Keywords: Asset valuation, Bank B, Bank regulation, Distressed institutions, Financial condition, Financial reform, Forbearance, Information sharing, Lender of last resort, Liquidity, Liquidity shock, Mover accent, Regulator arrangement, Regulator setting, Systemic risk, Unified regulator, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/193
Stock No:

WPIEA2011193
ISBN:

9781462306244
ISSN:

1018-5941

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