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Taming Systemically Important Financial Institutions

Author

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  • XAVIER FREIXAS
  • JEAN-CHARLES ROCHET
Abstract
We model a systemically important financial institution that is too big (or too interconnected) to fail. Without credible regulation and strong supervision, the shareholders of this institution might deliberately let its managers take excessive risk. We propose a solution to this problem, showing how insurance against systemic shocks can be provided without generating moral hazard. The solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a systemic risk authority endowed with special resolution powers, including the control of bankers’ compensation packages during crisis periods.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Xavier Freixas & Jean-Charles Rochet, 2013. "Taming Systemically Important Financial Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45, pages 37-58, August.
    • Handle: RePEc:mcb:jmoncb:v:45:y:2013:i::p:37-58
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