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Taming systemically important financial institutions


Rochet, Jean-Charles; Freixas, Xavier (2013). Taming systemically important financial institutions. Journal of Money, Credit, and Banking, 45(s1):37-58.

Abstract

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.

Abstract

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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7 citations in Web of Science®
9 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 January 2013
Deposited On:03 Mar 2014 08:12
Last Modified:08 Dec 2017 04:38
Publisher:Wiley-Blackwell
ISSN:0022-2879
Publisher DOI:https://doi.org/10.1111/jmcb.12036
Related URLs:http://www.parisschoolofeconomics.eu/IMG/pdf/FMI-PSE-FreixasRochet17.pdf
Other Identification Number:merlin-id:4385

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