Working Paper: CEPR ID: DP8927
Authors: Viral V. Acharya; T. Sabri Ç. N. C.
Abstract: One of the several regulatory failures behind the global financial crisis that started in 2007 has been the regulatory focus on individual, rather than systemic, risk of financial institutions. Focusing on systemically important assets and liabilities (SIALs) rather than individual financial institutions, we propose a set of resolution mechanisms, which is not only capable of inducing market discipline and mitigating moral hazard, but also capable of addressing the associated systemic risk, for instance, due to the risk of fire sales of collateral assets. Furthermore, because of our focus on SIALs, our proposed resolution mechanisms would be easier to implement at the global level compared to mechanisms that operate at the level of individual institutional forms. We, then, outline how our approach can be specialized to the repo market and propose a repo resolution authority for reforming this market.
Keywords: crises; fire sales; macroprudential regulation; resolution authority; runs; sale and repurchase agreements; systemic risk
JEL Codes: E58; G01; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial regulations (G28) | Systemic risk outcomes (F65) |
| Regulatory focus on individual financial institutions (G28) | Systemic vulnerabilities (F65) |
| Inadequate resolution mechanisms (D47) | Systemic risks associated with SIALs (F65) |
| Failure of institutions like Lehman Brothers (F65) | Widespread financial instability (F65) |
| Focus on SIALs (Y80) | Improved regulatory outcomes (G18) |
| Repo Resolution Authority (G18) | Immediate liquidity to repo financiers (G21) |
| Repo Resolution Authority (G18) | Managing credit risk (G21) |
| Repo Resolution Authority (G18) | Preventing fire sales of collateral (G33) |
| Repo Resolution Authority (G18) | Inducing better market discipline (G18) |
| Repo Resolution Authority (G18) | Reducing likelihood of systemic crises (F65) |