Can Regulation Control Systemic Risk?
It is a description that means almost exactly the opposite of what it seems. “Too big to fail” doesn’t mean a financial institution cannot fail, but that it cannot be allowed to do so. Should that failure occur, it would bring catastrophe to the financial markets and the “real” economy. As the financial crisis unfolded in 2008, federal regulators judged Bear Stearns, Fannie Mae, Freddie Mac, American International Group and a number of other financial institutions too big to be allowed to collapse, despite the firms’ missteps. The whole notion of rescuing such “TBTF” firms violates the principle of allowing the markets to judge which players sink and swim. But when regulators opted to let Lehman Brothers fail in September 2008, a tsunami roared through the markets and economy. Now, with the worst of the crisis apparently over, regulators, lawmakers and other experts are debating how to treat such firms in the future. “There are two issues with too-big-to-fail,” says Wharton finance pro
Related Questions
- How does MSc Management and Regulation of Risk programme differ from other programmes offered by the department?
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