Abstract
Government officials everywhere acknowledge a responsibility for overseeing systemic risk. But before one can begin to control a target variable (even something as straightforward as the temperature of a room), one must define the variable comprehensively and fashion from this definition one or more verifiable metrics for monitoring the target. Official definitions of systemic risk fail both of these tests.
Official definitions focus on a perceived potential for substantial spillovers of institutional defaults across important firms in the financial sector and from this sector to the real economy. These definitions are not comprehensive because they exclude a systemic phenomenon; this is that substantial spillovers of actual defaults have remained largely and predictably hypothetical.
This chapter was published in the Atlantic Economic Journal, Vol. 38, September 2010, and is being reprinted with permission. It builds upon and extends the ethical arguments presented in the previous chapter and reproduces and condenses some key passages from that essay.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
I have in mind the push to adopt Basel II in the face of defects such as those uncovered by Kupiec (2009).
- 2.
References
Acharya V, Schnabl P, Suarez G (2010) Securitization without risk transfer. NBER Working Paper No. 15730, Cambridge, MA, Feb
Avgouleas E, Goodhart C, Schoenmaker D (2010) Living wills as a catalyst for action. DSF Policy Paper No. 4, 1 May. Available at: http://ssrn.com/abstract:1533808
Baker D, McArthur T (2009) The value of the “too big to fail” big bank subsidy. Center for Economic and Policy Research Issue Brief, Washington, DC, Sept. Available at http://www.cepr.net/documents/publications/too-big-to-fail-2009-09.pdf
Carbo-Valverde S, Kane E, Rodriguez-Fernandez F (2010) Regulatory arbitrage in cross-border mergers of banks in the EU. Journal of Money, Credit and Banking (forthcoming)
Duan J-C, Moreau AF, Sealey CW (1992) Fixed-rate deposit insurance and risk-shifting behavior at commercial banks. J Bank Finance 16:715–742
Eberlein E, Madan D (2010) Unlimited liabilities, reserve capital requirements, and the taxpayer put option. Unpublished Working Paper. University of Maryland, College Park, MD (March 20). Available at SSRN: http://ssrn.com/abstract=1540813
Ferguson T, Johnson R (2009) Too big to bail: the “paulson put,” presidential politics, and the global financial meltdown. Int J Polit Econ 38(1):3–34 and 2:5–43
Flannery MJ (2009) Stabilizing large financial institutions with contingent capital certificates. Unpublished University of Florida Working Paper, 18 Sept. Available at SSRN: http://ssrn.com/abstract=1485689
Gorton G (2008) The panic of 2007. Federal Reserve Bank of Kansas City, Jackson Hole Conference, Aug. Available at http://www.kc.frb.org/publicat/sympos/2008/gorton.08.04.08.pdf
Gropp R, Moerman G (2004) Measurement of contagion in banks’ equity prices. J Int Money Finance 23(3):405–459
Hart O, Zingales L (2009) A new capital regulation for large financial institutions. Chicago Booth Research Paper No. 09-36, 2 Oct. Available at SSRN: http://ssrn.com/abstract=1533274
Herring RJ (2010) Wind-down plans as an alternative to bailouts: the cross-border challenges. In: Scott K, Shultz G, Taylor J (eds) Ending government bailouts as we know them. Hoover Press, Palo Alto, CA
Hovakimian A, Kane EJ (2000) Effectiveness of capital regulation at U.S. commercial banks, 1985–1994. J Finance 55:451–469, Mar
Huang X, Zhou H, Zhu H (2009) A framework for assessing the systemic risk of major financial institutions. Bank for International Settlements Working Paper No. 281, Apr. Available at: http://www.bis.org/publ/work281.pdf?noframes=1
Kane EJ (1986) Appearance and reality in deposit insurance: the case for reform. J Bank Finance 10:175–188, June
Kane EJ (1989) The S&L insurance mess: how did it happen? Urban Institute Press, Washington, DC
Kane EJ (2009a) Incentive roots of the securitization crisis and its early mismanagement. Yale J Regul 21(Winter):28–33
Kane EJ (December 2009b) Extracting nontransparent subsidies by strategically expanding and contracting a financial institution’s balance sheet. J Financ Serv Res 35:161–68
Kane EJ (2010) The importance of monitoring and mitigating the safety-net consequences of regulation-induced innovation. Rev Soc Econ 68(2):145–161
Kupiec P (2009) How well does the Vasicek Basel model fit the data? Evidence from a long time series of corporate credit rating data. Federal Deposit Insurance Corporation Working Paper. Available at SSRN: http://ssrn.com/abstract=1523246
Levine R (2009) The sentinel: an auxiliary precaution for governing financial regulations. Presented at Federal Reserve Bank of Chicago’s Twelfth Annual International Conference, Sept. Available at: http://www.chicagofed.org/digital_assets/others/events/2009/twelfth_annual_international_conference/2009_international_levine.pdf
Lo AW (2009) The feasibility of systemic risk measurement. Testimony before the financial services committee of the U.S. house of representatives, 19 Oct
Merton RC (1977) An analytic derivation of the cost of deposit insurance and loan guarantees. J Bank Finance 1:3–11
Merton RC (1978) On the cost of deposit insurance when there are surveillance costs. J Bus 51:439–452
Ronn E, Verma AR (1986) Pricing risk-adjusted deposit insurance: an option-based model. J Finance 41:871–895
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2011 Networks Financial Institute
About this chapter
Cite this chapter
Kane, E.J. (2011). Redefining and Containing Systemic Risk. In: Tatom, J. (eds) Financial Market Regulation. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6637-7_8
Download citation
DOI: https://doi.org/10.1007/978-1-4419-6637-7_8
Published:
Publisher Name: Springer, New York, NY
Print ISBN: 978-1-4419-6636-0
Online ISBN: 978-1-4419-6637-7
eBook Packages: Business and EconomicsEconomics and Finance (R0)