July 8, 2010

Systemic risk in the financial sector; a review and synthesis

Grote schuldeisers van banken moeten risico lopen

Press release
Bij het voorkómen van bankencrises spelen de volgende problemen een rol: het risico op een crisis is moeilijk meetbaar, banken willen regulering ontwijken, toezichthouders hebben de neiging te laat in te grijpen, en overheidsgaranties zijn te goedkoop.

We distinguish between two classes of mechanisms: contagion within the financial sector and pro-cyclical connection between the financial sector and the real economy.

Regulation can diminish systemic risk by reducing these externalities. However, regulation of systemic risk faces several problems. First, systemic risk and its costs are difficult to quantify. Second, banks have strong incentives to evade regulation meant to reduce systemic risk. Third, regulators are prone to forbearance. Finally, the inability of governments to commit not to bail out systemic institutions creates moral hazard and reduces the market’s incentive to price systemic risk.

Strengthening market discipline can play an important role in addressing these problems, because it reduces the scope for regulatory forbearance, does not rely on complex information requirements, and is difficult to manipulate.

Contacts

Michiel Bijlsma Read more
Jeroen Klomp Read more
Sijmen Duineveld Read more