## 3. Externalities related to interconnectedness, caused by the propagation of shocks from

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---

### Introduction and framing
- Motivation: The 2007-08 financial crisis and the ensuing Great Recession prompted a reexamination of macroeconomic policy and financial regulation, highlighting that financial stability has a critical bearing on macroeconomic outcomes.
- Distinction: Microprudential regulation (ensuring individual institution solvency) is necessary but not sufficient to safeguard system-wide stability; macroprudential policy is aimed at systemic risk—“the risk of developments that threaten the stability of the financial system as a whole and consequently the broader economy” (Bernanke, 2009).
- Purpose of the paper: Focus on the economic rationale for macroprudential policy by identifying market failures (externalities) that give rise to systemic risk and assessing how proposed macroprudential tools address them.
- Central policy tools examined: capital requirements (including time-varying and systemic risk-based surcharges), liquidity requirements, restrictions on activities/assets/liabilities, and taxes.

### Identified externalities that generate systemic risk
- Three core externalities (intermediate targets for macroprudential policy):
  - Externalities related to strategic complementarities
    - Banks and intermediaries take excessive or correlated risks during financial upswings.
    - Mechanisms include competition-driven reductions in screening, reputational/benchmarking effects, and anticipation of government bailouts that incentivize correlated risk-taking.
  - Externalities related to fire sales
    - Generalized sell-offs force asset sales at prices below fundamentals, causing balance-sheet losses and cascading sales.
    - Fire sales arise from maturity transformation and reliance on short-term/wholesale funding; vulnerabilities are often built up in booms (overborrowing, excessive leverage).
  - Externalities related to interconnectedness
    - Distress at one institution propagates through asset-price channels, bilateral interbank exposures, or real-economy feedback.
    - High interconnectedness can mitigate small shocks but amplify large shocks; effects are especially strong for systemically important financial institutions (SIFIs).
- Note on SIFIs: Anticipated bailouts historically subsidize SIFIs, increase risk-taking incentives, reduce market discipline, and can create a race to become systemically important.

### Mapping externalities to macroprudential policy tools
- Summary mapping (as presented in the paper):
  - Strategic complementarities: Capital requirements (surcharges) and restrictions on activities/assets/liabilities.
  - Fire sales: Capital requirements, liquidity requirements, and taxation.
  - Interconnectedness: Capital requirements, restrictions on activities/assets/liabilities, and taxation.
- Key observations about instruments:
  - Many macroprudential tools are adaptations of microprudential measures but are applied contingent on aggregate behavior or a bank’s position in the system.
  - Instruments can be complementary; no single tool is a “silver bullet.”
  - Conflicts can arise between macroprudential and microprudential objectives (e.g., countercyclical vs. through-the-cycle capital incentives).

### How tools address each externality (selected details)
- Strategic complementarities
  - Capital requirements and restrictions on asset allocation limit expected gains from correlated risky strategies.
  - Time-varying capital surcharges (linked to aggregate credit growth) and adjusted risk weights (Basel III) aim to mitigate risk-taking in booms.
  - Quantity restrictions (LTV, DTI) bind in expansions and directly constrain asset-side risk accumulation.
  - Complementarity: capital buffers provide incentives and loss absorption; quantity limits target situations where capital ratios appear superficially adequate due to buoyant asset prices.
- Fire sales
  - Time-varying capital requirements that are higher in upturns provide buffers to reduce the need to sell assets at depressed prices.
  - Liquidity and stable funding requirements (Basel III) limit reliance on short-term debt that can trigger run-like funding withdrawals.
  - Taxation of unstable funding can be calibrated to reflect price differences between long- and short-term funding and can be flexible during stress episodes.
  - Complementarity: capital measures act on loss-absorption; funding and liquidity measures act on the liability side to reduce forced deleveraging.
- Interconnectedness
  - Capital surcharges linked to systemic importance aim to reduce incentives to become systemically important and create larger loss-absorbing buffers.
  - Restrictions on activities (e.g., Volcker-like limits, ring-fencing) can limit implicit subsidies and provide firewalls between risky and essential operations.
  - Pigouvian taxes based on systemic risk contributions have theoretical appeal but face practical measurement and calibration challenges.

### Central role of capital-based tools
- Main finding: Time-varying and systemic risk-based capital surcharges can address all three identified externalities, making capital-based tools likely to play an important role in macroprudential frameworks.
- Practical linkage: Capital-based tools are closely tied to microprudential regulation and are already part of Basel III.
- Cost considerations:
  - Literature suggests that in the long run the impact of higher bank capital on the cost of loans is likely to be small (Kashyap et al., 2010; Admati et al., 2010; Herring, 2011; Mehran and Thakor, 2011).
  - Transition costs may be significant unless higher capital requirements are phased in gradually to allow retained earnings and market timing for equity issuance.

### Measurement, calibration, and implementation challenges
- Systemic risk measurement:
  - Multiple metrics capture facets of systemic risk and the three externalities (e.g., credit-to-GDP gap, property prices, risk premia, leverage; CoVaR; systemic shortfall; stress tests; forward-looking indicators).
  - Any single metric can proxy multiple externalities, complicating instrument choice.
- Calibration challenges:
  - Policymakers currently rely on “rule of thumb” approaches; quantitative evidence on effectiveness and optimal calibration of tools is limited.
  - Open calibration questions include how high capital surcharges should be and the optimal levels of LTV or DTI limits.
  - Further fundamental and applied research is required to reduce regulatory discretion and improve policy precision.

### Policy implications and recommendations
- Use a combination of instruments to exploit complementarities: capital surcharges, liquidity/stable funding requirements, activity restrictions, and taxes should be deployed in a coordinated manner.
- Prioritize development and implementation of time-varying and systemic risk-based capital surcharges as a central component of macroprudential frameworks.
- Complement capital tools with direct quantity restrictions (DTI/LTV) when capital ratios may understate buildup of vulnerabilities in booms.
- Consider taxation of unstable funding as an alternative or complement to liquidity requirements, noting calibration trade-offs.
- Invest in improving measurement of systemic risk contributions and evidence on the effectiveness of policy tools to enable better calibration and to limit regulatory discretion.

### Conclusions
- Macroprudential policy should be grounded in correcting market failures (externalities) that generate systemic risk: strategic complementarities, fire sales, and interconnectedness.
- Correcting these externalities serves as intermediate targets for macroprudential policy and helps guide instrument choice.
- Multiple tools can address the same externality, and complementarities among tools imply a combinatory approach is often appropriate.
- Capital requirements—especially time-varying and systemic risk-based surcharges—are likely to be central to any macroprudential framework.
- The most pressing challenge for policy design is to acquire robust evidence on the effectiveness and optimal calibration of alternative macroprudential tools.

*Source: _sdn1205 - 3. Externalities related to interconnectedness, caused by the propagation of shocks from*

### Executive Summary ......................................................................................................

### Executive Summary

### Context
- The recent financial crisis has led to a reexamination of policies for macroeconomic and financial stability.
- Part of the current debate involves the adoption of a macroprudential approach to financial regulation, with an aim toward mitigating boom-bust patterns and systemic risks in financial markets.

### Contribution of the paper
- Lays out the key sources of market failures that can justify macroprudential regulation.
- Explains how externalities associated with the activity of financial intermediaries can lead to systemic risk, and thus require specific policies to mitigate such risk.

### Classification of externalities that can lead to systemic risk
- 1. Externalities related to strategic complementarities, that arise from the strategic interaction of banks (and other financial institutions) and cause the build-up of vulnerabilities during the expansionary phase of a financial cycle;
- 2. Externalities related to fire sales, that arise from a generalized sell-off of financial assets causing a decline in asset prices and a deterioration of the balance sheets of intermediaries, especially during the contractionary phase of a financial cycle;

*Source: _sdn1205 - Executive Summary*

### 3. Externalities related to interconnectedness, caused by the propagation of shocks from

### _sdn1205 - 3. Externalities related to interconnectedness, caused by the propagation of shocks from

### Introduction and framing
- Motivation: The 2007-08 financial crisis and the ensuing Great Recession prompted a reexamination of macroeconomic policy and financial regulation, highlighting that financial stability has a critical bearing on macroeconomic outcomes.
- Distinction: Microprudential regulation (ensuring individual institution solvency) is necessary but not sufficient to safeguard system-wide stability; macroprudential policy is aimed at systemic risk—“the risk of developments that threaten the stability of the financial system as a whole and consequently the broader economy” (Bernanke, 2009).
- Purpose of the paper: Focus on the economic rationale for macroprudential policy by identifying market failures (externalities) that give rise to systemic risk and assessing how proposed macroprudential tools address them.
- Central policy tools examined: capital requirements (including time-varying and systemic risk-based surcharges), liquidity requirements, restrictions on activities/assets/liabilities, and taxes.

### Identified externalities that generate systemic risk
- Three core externalities (intermediate targets for macroprudential policy):
  - Externalities related to strategic complementarities
    - Banks and intermediaries take excessive or correlated risks during financial upswings.
    - Mechanisms include competition-driven reductions in screening, reputational/benchmarking effects, and anticipation of government bailouts that incentivize correlated risk-taking.
  - Externalities related to fire sales
    - Generalized sell-offs force asset sales at prices below fundamentals, causing balance-sheet losses and cascading sales.
    - Fire sales arise from maturity transformation and reliance on short-term/wholesale funding; vulnerabilities are often built up in booms (overborrowing, excessive leverage).
  - Externalities related to interconnectedness
    - Distress at one institution propagates through asset-price channels, bilateral interbank exposures, or real-economy feedback.
    - High interconnectedness can mitigate small shocks but amplify large shocks; effects are especially strong for systemically important financial institutions (SIFIs).
- Note on SIFIs: Anticipated bailouts historically subsidize SIFIs, increase risk-taking incentives, reduce market discipline, and can create a race to become systemically important.

### Mapping externalities to macroprudential policy tools
- Summary mapping (as presented in the paper):
  - Strategic complementarities: Capital requirements (surcharges) and restrictions on activities/assets/liabilities.
  - Fire sales: Capital requirements, liquidity requirements, and taxation.
  - Interconnectedness: Capital requirements, restrictions on activities/assets/liabilities, and taxation.
- Key observations about instruments:
  - Many macroprudential tools are adaptations of microprudential measures but are applied contingent on aggregate behavior or a bank’s position in the system.
  - Instruments can be complementary; no single tool is a “silver bullet.”
  - Conflicts can arise between macroprudential and microprudential objectives (e.g., countercyclical vs. through-the-cycle capital incentives).

### How tools address each externality (selected details)
- Strategic complementarities
  - Capital requirements and restrictions on asset allocation limit expected gains from correlated risky strategies.
  - Time-varying capital surcharges (linked to aggregate credit growth) and adjusted risk weights (Basel III) aim to mitigate risk-taking in booms.
  - Quantity restrictions (LTV, DTI) bind in expansions and directly constrain asset-side risk accumulation.
  - Complementarity: capital buffers provide incentives and loss absorption; quantity limits target situations where capital ratios appear superficially adequate due to buoyant asset prices.
- Fire sales
  - Time-varying capital requirements that are higher in upturns provide buffers to reduce the need to sell assets at depressed prices.
  - Liquidity and stable funding requirements (Basel III) limit reliance on short-term debt that can trigger run-like funding withdrawals.
  - Taxation of unstable funding can be calibrated to reflect price differences between long- and short-term funding and can be flexible during stress episodes.
  - Complementarity: capital measures act on loss-absorption; funding and liquidity measures act on the liability side to reduce forced deleveraging.
- Interconnectedness
  - Capital surcharges linked to systemic importance aim to reduce incentives to become systemically important and create larger loss-absorbing buffers.
  - Restrictions on activities (e.g., Volcker-like limits, ring-fencing) can limit implicit subsidies and provide firewalls between risky and essential operations.
  - Pigouvian taxes based on systemic risk contributions have theoretical appeal but face practical measurement and calibration challenges.

### Central role of capital-based tools
- Main finding: Time-varying and systemic risk-based capital surcharges can address all three identified externalities, making capital-based tools likely to play an important role in macroprudential frameworks.
- Practical linkage: Capital-based tools are closely tied to microprudential regulation and are already part of Basel III.
- Cost considerations:
  - Literature suggests that in the long run the impact of higher bank capital on the cost of loans is likely to be small (Kashyap et al., 2010; Admati et al., 2010; Herring, 2011; Mehran and Thakor, 2011).
  - Transition costs may be significant unless higher capital requirements are phased in gradually to allow retained earnings and market timing for equity issuance.

### Measurement, calibration, and implementation challenges
- Systemic risk measurement:
  - Multiple metrics capture facets of systemic risk and the three externalities (e.g., credit-to-GDP gap, property prices, risk premia, leverage; CoVaR; systemic shortfall; stress tests; forward-looking indicators).
  - Any single metric can proxy multiple externalities, complicating instrument choice.
- Calibration challenges:
  - Policymakers currently rely on “rule of thumb” approaches; quantitative evidence on effectiveness and optimal calibration of tools is limited.
  - Open calibration questions include how high capital surcharges should be and the optimal levels of LTV or DTI limits.
  - Further fundamental and applied research is required to reduce regulatory discretion and improve policy precision.

### Policy implications and recommendations (implicit in analysis)
- Use a combination of instruments to exploit complementarities: capital surcharges, liquidity/stable funding requirements, activity restrictions, and taxes should be deployed in a coordinated manner.
- Prioritize development and implementation of time-varying and systemic risk-based capital surcharges as a central component of macroprudential frameworks.
- Complement capital tools with direct quantity restrictions (DTI/LTV) when capital ratios may understate buildup of vulnerabilities in booms.
- Consider taxation of unstable funding as an alternative or complement to liquidity requirements, noting calibration trade-offs.
- Invest in improving measurement of systemic risk contributions and evidence on the effectiveness of policy tools to enable better calibration and to limit regulatory discretion.

### Conclusions
- Macroprudential policy should be grounded in correcting market failures (externalities) that generate systemic risk: strategic complementarities, fire sales, and interconnectedness.
- Correcting these externalities serves as intermediate targets for macroprudential policy and helps guide instrument choice.
- Multiple tools can address the same externality, and complementarities among tools imply a combinatory approach is often appropriate.
- Capital requirements—especially time-varying and systemic risk-based surcharges—are likely to be central to any macroprudential framework.
- The most pressing challenge for policy design is to acquire robust evidence on the effectiveness and optimal calibration of alternative macroprudential tools.

*Source: _sdn1205 - 3. Externalities related to interconnectedness, caused by the propagation of shocks from*

### REFERENCES

### _sdn1205 - REFERENCES

### Systemic risk and financial networks
- Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi, 2012, “Systemic Risk and Stability in Financial Networks,” (unpublished; Boston, Massachusetts: MIT).
- Acharya, Viral, 2009, “A Theory of Systemic Risk and Design of Prudential Bank Regulation,” Journal of Financial Stability, Vol. 5, pp. 224–55.
- Acharya, Viral, and Tanju Yorulmazer, 2007, “Too Many to Fail—An Analysis of Time-inconsistency in Bank Closure Policies,” Journal of Financial Intermediation, Vol. 16, No. 1, pp 1–31.
- Adrian, Tobias, and Markus K. Brunnermeier, 2011, “CoVaR ,” NBER Working Paper 17454.
- Allen, Franklin, and Ana Babus, 2009, “Networks in Finance,” Chapter 21 in The Network Challenge, ed. by Paul Kleindorfer and Jerry Wind, (Philadelphia: Wharton School Publishing), pp. 367–82.
- Allen, Franklin, Ana Babus, and Elena Carletti, 2012, "Asset Commonality, Debt Maturity and Systemic Risk,” Journal of Financial Economics, forthcoming.
- Allen, Franklin, and Elena Carletti, 2011, “Systemic Risk and Macroprudential Regulation,” mimeo, University of Pennsylvania.
- Nier, Erlend, Jing Yang, Tanju Yorulmazer, and Amadeo Alentorn, 2007, “Network Models and Financial Stability,” Journal of Economic Dynamics and Control, Vol. 31, No. 6, pp. 2033-60.
- Gai, Prasanna, Andrew Haldane, and Sujit Kapadia, 2011, “Complexity, Concentration, and Contagion,” Journal of Monetary Economics, forthcoming.
- Brunnermeier Markus, Gary Gorton, and Arvind Krishnamurthy, 2010, “Risk Topography,” Working Paper (Princeton, N.J.: Princeton University).

### Macroprudential policy, crisis management, and regulatory frameworks
- Bank for International Settlements, 2011, “Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement,” Basel Committee on Banking Supervision, November
- Bank of England, 2011, “Instruments of Macroprudential Policy,” Discussion Paper.
- Basel Committee on Banking Supervision, 2011, “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (Revised version June 2011).
- Financial Stability Board (FSB), 2011a, “Macro-prudential Policy Tools and Frameworks: Progress Report to G20,” October, Basel, Switzerland.
- Financial Stability Board (FSB), 2011b, “Shadow Banking: Strengthening Oversight and Regulation,” Basel, Switzerland, October.
- Crockett, Andrew, 2000, “Marrying the Micro- and Macroprudential Dimensions of Financial Stability,” BIS Speeches, 21 September (Switzerland: Bank of International Settlements).
- Claessens, Stijn, Richard J. Herring, and Dirk Schoenmaker, 2010, “A Safer World Financial System: Improving the Resolution of Systemic Institutions” Geneva Reports on the World Economy (London, UK: CEPR).
- Claessens, Stijn, Ceyla Pazarbasioglu, Luc Laeven, Marc Dobler, Fabian Valencia, Oana Nedelescu, and Katherine Seal, 2011, “Crisis Management and Resolution: Early Lessons from the Financial Crisis,” IMF Staff Discussion Note 11/05 (Washington: International Monetary Fund).
- International Monetary Fund, 2010b, “Systemic Risk and the Redesign of Financial Regulation,” Chapter 2 in Global Financial Stability Report, September (Washington: International Monetary Fund).
- International Monetary Fund, 2011a, “Macroprudential Policy: An Organizing Framework,” Board Paper, April (Washington: International Monetary Fund).
- International Monetary Fund, 2011b, “Towards Operationalizing Macroprudential Policies: When to Act?” Chapter 3 in Global Financial Stability Report, September (Washington: International Monetary Fund).
- Schoenmaker, Dirk, and Peter J. Wierts, 2011, “Macroprudential Policy: The Need for a Coherent Policy Framework,” DSF Policy Paper 13 (Amsterdam, The Netherlands: Duisenberg School of Finance).
- Shin, Hyun Song, 2011, “Adapting Macroprudential Approaches to Emerging and Developing Economies,” Report commissioned by the World Bank’s Poverty Reduction and Economic Management (PREM) Network, May (Washington: The World Bank).
- Lim, C.F. Columba, A. Costa, P. Kongsamut, A. Otani, M. Saiyid, T. Wezel, and X. Wu, 2011, “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences,” IMF Working Paper 11/238 (Washington: International Monetary Fund).

### Capital regulation, bank capital, and contagion
- Admati, Anat, Peter DeMarzo, Martin Hellwig, and Paul Pfleiderer, 2011, “Fallacies, Irrelevant Facts and Myths in the Discussion of Capital Regulation: Why Bank Capital is Not Expensive,” Stanford GSB Research Paper No. 2065 (Stanford, Calif.: Stanford Graduate School of Business).
- Basel Committee on Banking Supervision, 2011, “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (Revised version June 2011).
- De Nicolò, Gianni, Andrea Gamba and Marcella Lucchetta, 2012, “Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking”, IMF Working Paper 12/72 (Washington: International Monetary Fund).
- Hanson, Samuel, Anil Kayshap, and Jeremy Stein, 2011, “A Macroprudential Approach to Financial Regulation,” Journal of Economic Perspective, Vol. 25, No. 1, Winter, pp. 3–28.
- Herring, Richard, 2011, “The Capital Conundrum,” International Journal of Central Banking, Vol. 7, No. 4, pp.171–87.
- Kashyap, Anil, Jeremy Stein, and Samuel Hanson, 2010, “An Analysis of the Impact of ‘Substantially Heightened’ Capital Requirements on Large Financial Institutions,” Working (unpublished; Cambridge, Harvard University).
- Repullo, Rafael, and Javier Suarez, 2012, “The Procyclical Effects of Bank Capital Regulation,” C.E.P.R. Discussion Paper 8897.
- Mehran, Hamid, and Anjan Thakor, 2011, “Bank Capital and Value in the Cross-Section,” Review of Financial Studies, Vol. 24, No. 4, pp. 1019–67.
- Ueda, Kenichi, and Beatrice Weder di Mauro, 2012, “Quantifying the Value of the Subsidy for Systemically Important Financial Institutions,” IMF Working Paper 12/128 (Washington: International Monetary Fund).

### Liquidity, funding, and lender-of-last-resort issues
- Diamond, Douglas, and Raghuram G. Rajan, 2005, “Liquidity Shortages and Banking Crises,” Journal of Finance, Vol. 60, No. 2, pp, 615–47.
- Ratnovski, Lev, 2009, “Bank Liquidity Regulation and the Lender of Last Resort,” Journal of Financial Intermediation, Vol. 18, No. 4, pp. 541–88.
- Gorton, Gary, 2009, “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” paper prepared for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference, May.
- Gorton, Gary, and Ping He, 2008, “Bank Credit Cycles,” Review of Economic Studies, Vol. 75, No. 4, pp. 1181–214.
- Gorton, Gary, and Andrew Metrick, 2010, “Regulating the Shadow Banking System,” Brooking Papers on Economic Activity, fall, pp. 261–312 (Washington: Brookings).
- Huang, Rocco, and Lev Ratnovski, 2011, “The Dark Side of Bank Wholesale Funding,” Journal of Financial Intermediation, Vol. 20, No. 2, pp. 248–63.
- Perotti, Enrico, and Javier Suarez, 2011, “A Pigouvian Approach to Liquidity Regulation,” International Journal of Central Banking, Vol. 7, No.4, pp. 3–41.
- Wagner, Wolf, 2011, “Systemic Liquidation Risk and the Diversity–Diversification Trade-Off,” Journal of Finance, Vol. 66, No. 4, pp. 1141–75.
- Stein, Jeremy, 2012, “Monetary Policy as Financial-Stability Regulation,” Quarterly Journal of Economics, Vol. 127, No. 1, 57–95.

### Shadow banking, market freezes, and fire sales
- Pozsar, Zoltan, Tobias Adrian, Adam Ashcraft, and Hayley Boesky, 2010, “Shadow Banking,” Federal Reserve Bank of New York Staff Report 458 (New York: Federal Reserve Bank of New York).
- Brunnermeier Markus, Gary Gorton, and Arvind Krishnamurthy, 2010, “Risk Topography,” Working Paper (Princeton, N.J.: Princeton University).
- Farhi, Emmanuel, and Jean Tirole, 2011, “Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts,” American Economic Review, forthcoming.
- Bebchuk, Lucian, and Itay Goldstein, 2011, “Self-Fulfilling Market Freezes,” Review of Financial Studies, Vol. 24, No. 11, pp. 3519–55.
- Diamond, Douglas, and Raghuram G. Rajan, 2012, “Fear of Fire Sales, Illiquidity Seeking, and Credit freezes,” forthcoming, Quarterly Journal of Economics.
- Shleifer, Andrei, and Robert W. Vishny, 2010, “Unstable Banking,” Journal of Financial Economics, Vol. 97, No. 3, pp. 303–18.
- Huang, Rocco, and Lev Ratnovski, 2011, “The Dark Side of Bank Wholesale Funding,” Journal of Financial Intermediation, Vol. 20, No. 2, pp. 248–63.

### Credit booms, lending standards, and capital inflows
- Dell’Ariccia, Giovanni, Deniz Igan, Luc Laeven, and Hui Tong, 2012, “Policies for Macrofinancial Stability: Options to Deal with Credit Booms,” IMF Staff Discussion Note SDN/12/06 (Washington: International Monetary Fund).
- Dell'Ariccia, Giovanni, and Robert Marquez, “Lending Booms and Lending Standards,” Journal of Finance, Vol. 61, No. 5, pp. 2511–46.
- Crowe, Christopher, Giovanni Dell’Ariccia, Deniz Igan, and Pau Rabanal, 2011, “Policies for Macrofinancial Stability: Options to Deal with Real Estate Booms,” IMF Staff Discussion Note, SDN/11/02 (Washington: International Monetary Fund).
- Lorenzoni, Guido, 2008, “Inefficient Credit Booms,” Review of Economics Studies, Vol. 75, pp. 809–33.
- Ostry, Jonathan David, Atish R. Ghosh,, Karl Friedrich Habermeier,  Luc Laeven, Marcos Chamon, Mahvash Saeed Qureshi, and Annamaria Kokenyne, 2011, “Managing Capital Inflows: What Tools to Use?” IMF Staff Discussion Note 11/06 (Washington: International Monetary Fund).
- Mooij, Ruud A. de, 2011, “Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions,” IMF Staff Discussion Note 11/11 (Washington: International Monetary Fund).

### Methodologies, models, and measurement approaches
- Bisias, Dimitrios, Mark Flood, Andrew Lo, and Stavros Valavanis, 2012, “A Survey of Systemic Risk Analytics,” Office of Financial Research, Working Paper No. 1, January.
- Gray, Dale F., and Andreas A. Jobst, 2011, “Systemic Contingent Claims Analysis— A Model Approach to Systemic Risk,” in LaBrosse, John R., Olivares-Caminal, Rodrigo and Dalvinder Singh, eds., Managing Risk in the Financial System (London: Edward Elgar), pp. 93-110.
- Duffie, Darrell, 2011, “Systemic Risk Exposures: A 10-by-10-by-10 Approach,” (unpublished; Stanford, Calif.: Stanford Graduate School of Business).
- Capuano, Christian, 2008, “The Option-iPoD: The Probability of Default Implied by Option Prices Based on Entropy,” IMF Working Paper 08/194 (Washington: International Monetary Fund).
- Gennaioli, Nicola, Andrei Shleifer, and Robert Vishny, 2011, “A Model of Shadow Banking,” NBER Working Paper 17115 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Dewatripont, Mathias, and Jean Tirole, 1994, The Prudential Regulation of Banks, (Cambridge, Massachusetts: MIT Press).
- Weitzman, Martin L, 1974. “Prices vs. Quantities,” Review of Economic Studies, Vol. 41, No. 4, pp. 477–91.
- Kaplow, Louis, and Steven M. Shavell, 2002, “On the Superiority of Corrective Taxes to Quantity Regulation,” American Law and Economics Review, Vol. 4, No. 1, pp. 1–17.

### Empirical studies, historical and policy perspectives
- Blanchard, Olivier, 2009, “The Crisis: Basic Mechanisms, and Appropriate Policies,” IMF Working Paper 09/80 (Washington: International Monetary Fund).
- Blanchard, Olivier, Giovanni Dell’Ariccia, and Paolo Mauro, 2010, “Rethinking Macroeconomic Policy,” IMF Staff Position Note 10/03. (Washington: International Monetary Fund).
- Flannery, Mark J., 1998, “Using Market Information in Prudential Bank Supervision:  A Review of the U.S. Empirical Evidence,” Journal of Money, Credit, and Banking, Vol. 30, No. 3, pp. 273–305.
- Saurina, Jesus, 2009, “Dynamic Provisioning. The Experience of Spain,” Crisis Response, Note Number 7 (Washington: The World Bank).
- Ruckes, Martin, 2004, “Bank Competition and Credit Standards,” Review of Financial Studies, Vol. 17, No. 4, pp.1073–102.
- O’Hara, Maureen, and Wayne Shaw, 1990, “Deposit Insurance and Wealth Effects: The Value of Being ‘Too Big to Fail’,” The Journal of Finance, Vol. 45, No. 5, pp. 1587-600.
- French, Kenneth, et al., 2010, The Squam Lake Report: Fixing the Financial System (Princeton: Princeton University Press).

*Source: _sdn1205 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2012/_sdn1205.pdf_