Working Paper: CEPR ID: DP12862
Authors: Franklin Allen; Xian Gu
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
Keywords: financial crises; asset price bubbles; contagion; macroprudential
JEL Codes: G01; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| panics (E44) | banking crises (G01) |
| asset price falls (G19) | financial crises (G01) |
| contagion (F65) | financial instability (F65) |
| panics (E44) | asset price falls (G19) |
| asset price falls (G19) | contagion (F65) |
| contagion (F65) | panics (E44) |