Systemic Risk, Crises, and Macroprudential Regulation

by Xavier Freixas, Luc Laeven, Jose-Luis Peydro

Overview

A framework for macroprudential regulation that defines systemic risk and macroprudential policy, describes macroprudential tools, and surveys the effectiveness of existing macroprudential regulation.

The recent financial crisis has shattered all standard approaches to banking regulation. Regulators now recognize that banking regulation cannot be simply based on individual financial institutions' risks. Instead, systemic risk and macroprudential regulation have come to the forefront of the new regulatory paradigm. Yet our knowledge of these two core aspects of regulation is still limited and fragmented. This book offers a framework for understanding the reasons for the regulatory shift from a microprudential to a macroprudential approach to financial regulation. It defines systemic risk and macroprudential policy, cutting through the generalized confusion as to their meaning; contrasts macroprudential to microprudential approaches; discusses the interaction of macroprudential policy with macroeconomic policy (monetary policy in particular); and describes macroprudential tools and experiences with macroprudential regulation around the world.

The book also considers the remaining challenges for establishing effective macroprudential policy and broader issues in regulatory reform. These include the optimal size and structure of the financial system, the multiplicity of regulatory bodies in the United States, the supervision of cross-border financial institutions, and the need for international cooperation on macroprudential policies.

Product Details

ISBN-13:	9780262549011
Publisher:	MIT Press
Publication date:	08/22/2023
Pages:	488
Product dimensions:	6.00(w) x 9.00(h) x (d)

About the Author

Xavier Freixas is Emeritus Professor at Universitat Pompeu Fabra in Barcelona and Research Fellow at CEPR.

Luc Laeven is the Director-General of the Directorate General Research of the European Central Bank and coeditor of Deposit Insurance around the World (MIT Press).

José-Luis Peydró is ICREA Research Professor at the Universitat Pompeu Fabra.

Table of Contents

Foreword vii
Glossary xi
1 Introduction 1
2 A Primer on Systemic Risk 13
3 Systemic Risk: A Theoretical Framework 47
4 The Buildup of Financial Imbalances 73
5 Contagion 109
6 Systemic Risk and the Real Costs of Financial Crises 143
7 Measuring Systemic Risk 163
8 Systemic Risk and Microprudential Regulation 199
9 Systemic Risk and Macroprudential Regulation 251
10 Monetary Policy and Systemic Risk 291
11 New Challenges for Regulatory Policy 329
Appendix Data 367
Notes 395
References 417
Index 459

What People are Saying About This

Charles W. Calomiris

'Systemic risk' and 'macroprudential' regulation are the new buzzwords in the macro/banking literatures. After the recent crisis, academics got busy assembling lists of all the things that can go wrong in the financial system and all the things that policy makers might do to prevent problems. Amassing lists, however, equates all potential threats and policy responses and ignores the costs of complicating existing monetary policy and prudential regulation by introducing many new cyclical regulatory policy tools. In contrast, Freixas, Laeven, and Peydró come to grips with systemic risk in a practical way; combining theory and evidence, the authors manage to be both comprehensive and selective. This must-read book carefully defines systemic risk, considers all its dimensions, identifies the greatest sources of systemic risk (lending booms), and suggests a simple policy approach that avoids the pitfalls that are common in less thoughtful analyses of macroprudential regulation.

Endorsement

'Systemic risk' and 'macroprudential' regulation are the new buzzwords in the macro/banking literatures. After the recent crisis, academics got busy assembling lists of all the things that can go wrong in the financial system and all the things that policy makers might do to prevent problems. Amassing lists, however, equates all potential threats and policy responses and ignores the costs of complicating existing monetary policy and prudential regulation by introducing many new cyclical regulatory policy tools. In contrast, Freixas, Laeven, and Peydró come to grips with systemic risk in a practical way; combining theory and evidence, the authors manage to be both comprehensive and selective. This must-read book carefully defines systemic risk, considers all its dimensions, identifies the greatest sources of systemic risk (lending booms), and suggests a simple policy approach that avoids the pitfalls that are common in less thoughtful analyses of macroprudential regulation.

—Charles W. Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia University

From the Publisher

Using macroprudential policies to maintain financial stability, while monetary policy remains predicated to the achievement of price stability, is the current mantra. But, like the boy who has been taught about reproduction but has never met a girl, will the authorities, preferably central banks, be able to transform theory into effective practice when the time comes, against myriad political economy constraints? The authors of this beautifully written and lucid book take us carefully through the theory of, and the limited practical experiences with, both systemic risk and countervailing macroprudential policies. But neither they, nor we, can know many of the answers yet. But central banks, regulators, bankers, financiers, and economists will be much better prepared for future concerns with financial stability if they read this excellent book first.

—Charles A. E. Goodhart, Professor Emeritus of Banking and Finance and Director of the Research Programme in Financial Regulation of the Financial Markets Group at the London School of Economics, and former member of the Bank of England's Monetary Policy Committee

With the progressive blurring of boundaries between central bank and financial regulator, policy makers are increasingly called upon to exercise expertise across the overlapping tasks of monetary, macroprudential, and micro supervision and regulation policy. For this task, Systemic Risk, Crises, and Macroprudential Regulation provides an ideal reference and guide to what is known by both scholars and practitioners on what works and what does not work. A large recent literature is surveyed masterfully and in a way that, though avoiding oversimplification, is surprisingly accessible. Thoughtful guardians of finance will want to have this volume at hand as they seek solutions to avoid or manage the next wave of crises.

—Patrick Honohan, Governor of the Central Bank of Ireland

'Systemic risk' and 'macroprudential' regulation are the new buzzwords in the macro/banking literatures. After the recent crisis, academics got busy assembling lists of all the things that can go wrong in the financial system and all the things that policy makers might do to prevent problems. Amassing lists, however, equates all potential threats and policy responses and ignores the costs of complicating existing monetary policy and prudential regulation by introducing many new cyclical regulatory policy tools. In contrast, Freixas, Laeven, and Peydró come to grips with systemic risk in a practical way; combining theory and evidence, the authors manage to be both comprehensive and selective. This must-read book carefully defines systemic risk, considers all its dimensions, identifies the greatest sources of systemic risk (lending booms), and suggests a simple policy approach that avoids the pitfalls that are common in less thoughtful analyses of macroprudential regulation.

—Charles W. Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia University

Charles A. E. Goodhart

Using macroprudential policies to maintain financial stability, while monetary policy remains predicated to the achievement of price stability, is the current mantra. But, like the boy who has been taught about reproduction but has never met a girl, will the authorities, preferably central banks, be able to transform theory into effective practice when the time comes, against myriad political economy constraints? The authors of this beautifully written and lucid book take us carefully through the theory of, and the limited practical experiences with, both systemic risk and countervailing macroprudential policies. But neither they, nor we, can know many of the answers yet. But central banks, regulators, bankers, financiers, and economists will be much better prepared for future concerns with financial stability if they read this excellent book first.

Patrick Honohan

With the progressive blurring of boundaries between central bank and financial regulator, policy makers are increasingly called upon to exercise expertise across the overlapping tasks of monetary, macroprudential, and micro supervision and regulation policy. For this task, Systemic Risk, Crises, and Macroprudential Regulation provides an ideal reference and guide to what is known by both scholars and practitioners on what works and what does not work. A large recent literature is surveyed masterfully and in a way that, though avoiding oversimplification, is surprisingly accessible. Thoughtful guardians of finance will want to have this volume at hand as they seek solutions to avoid or manage the next wave of crises.