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Systemic Risk and Optimal Regulatory Architecture
Author:
Marco A Espinosa-Vega null

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Mr. Rafael Matta null

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Mr. Charles M. Kahn null

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Mr. Juan Sole
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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 193
Language:
English
Publication Date:
01 Aug 2011
DOI:
https://doi.org/10.5089/9781462306244.001
ISBN:
9781462306244
ISSN:
1018-5941
Pages:
24
Keywords:
WP; regulator arrangement; mover accent; Bank regulation; Systemic risk; Forbearance; Information sharing; Financial reform; unified regulator; bank B; regulator setting; liquidity shock; financial condition; Lender of last resort; Liquidity; Distressed institutions; Asset valuation
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund