December 2010 issue contents
Systemic Risk: Changing the Regulatory Perspective

by Jean-Charles Rochet
University of Z├╝rich and Toulouse School of Economics

Abstract

The article puts forward the view that the regulatory perspective on systemic risk should be changed drastically. The sub-prime crisis has indeed revealed many loopholes in the supervisory/regulatory framework for banks-in particular, the inability to deal with the too-big-to-fail syndrome and also the lack of resiliency of interbank and money markets. To a large extent, the contagion phenomena that took place in these markets were the necessary outcomes of the passive attitude of banking supervisors, who have let large banks develop a complex and opaque nexus of bilateral obligations. We propose two reforms: adopting a platform-based (instead of institutionbased) regulatory perspective on systemic risk and encouraging a generalized move to central counterparty clearing.

JEL Codes: G21, L51.

 
Full article (PDF, 18  pages 199 kb)