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Federal Reserve Bank of Philadelphia
Working Papers
The Interplay Among Financial Regulations, Resilience, and Growth
Franklin Allen
Itay Goldstein
Julapa Jagtiani

Interconnectedness has been an important source of market failures, leading to the recent financial crisis. Large financial institutions tend to have similar exposures and thus exert externalities on each other through various mechanisms. Regulators have responded by putting more regulations in place with many layers of regulatory complexity, leading to ambiguity and market manipulation. Mispricing risk in complex models and arbitrage opportunities through regulatory loopholes have provided incentives for certain activities to become more concentrated in regulated entities and for other activities to move into new areas in the shadow banking system. How can we design an effective regulatory framework that would perfectly rule out bank runs and TBTF (too big to fail) and to do so without introducing incentives for financial firms to take excessive risk? It is important for financial regulations to be coordinated across regulatory entities and jurisdictions and for financial regulations to be forward looking, rather than aiming to address problems of the past.

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Franklin Allen & Itay Goldstein & Julapa Jagtiani, The Interplay Among Financial Regulations, Resilience, and Growth, Federal Reserve Bank of Philadelphia, Working Papers 18-9, 16 Feb 2018.
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Keywords: financial reform; capital regulations; liquidity regulations; too big to fail; living wills; Dodd–Frank Wall Street Reform and Consumer Protection Act; financial stability; interconnectedness
DOI: 10.21799/frbp.wp.2018.09
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