IMF Working Papers

The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions

Author/Editor:

Stijn Claessens ; Laura E. Kodres

Publication Date:

March 14, 2014

Electronic Access:

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Summary:

We identify current challenges for creating stable, yet efficient financial systems using lessons from recent and past crises. Reforms need to start from three tenets: adopting a system-wide perspective explicitly aimed at addressing market failures; understanding and incorporating into regulations agents’ incentives so as to align them better with societies’ goals; and acknowledging that risks of crises will always remain, in part due to (unknown) unknowns – be they tipping points, fault lines, or spillovers. Corresponding to these three tenets, specific areas for further reforms are identified. Policy makers need to resist, however, fine-tuning regulations: a “do not harm” approach is often preferable. And as risks will remain, crisis management needs to be made an integral part of system design, not relegated to improvisation after the fact.

Series:

Working Paper No. 2014/046

Subject:

Financial crises Financial regulation and supervision Financial sector policy and analysis Financial services Liquidity requirements Shadow banking Systemic risk Tax incentives