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Title: The Interplay between Regulations and Financial Stability

Author(s): Franklin Allen and Xian Gu

Publication Date: April 2018

Keyword(s): Asset price bubbles, contagion, Financial crises and macroprudential

Programme Area(s): Financial Economics

Abstract: The crisis demonstrated that microprudential regulation focusing on the risks taken by individual banks is not sufficient to prevent crises. This is because it ignores systemic risk. Six types of systemic risk are identified, namely: (i) panics - banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; (iv) financial architecture; (v) foreign exchange mismatches in the banking system; (vi) behavioral effects from Knightian uncertainty. We focus on the first three as they are arguably the main causes of the 2007-9 crisis and consider regulatory and other policies to counteract them.

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Bibliographic Reference

Allen, F and Gu, X. 2018. 'The Interplay between Regulations and Financial Stability'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12862