The Design and Governance of Financial Stability Regimes

They are: crises in the financial system.5 • creating property rights over the socially costly activity, In other words, the social costs of instability in the financial thereby providing the basis for a market that was system are greater than the private costs to the managers, previously missing; creditors and shareholders of the failing or distressed firms. [...] The moral of the story is parts of the behaviour.14 That entails trying to pin down the that it is not enough to cure the problem of self-fulfilling runs underlying drivers of society’s problem. [...] If, as is the case, stability policy is overwhelmingly based on quantity constraints, why do the financial authorities not seek To sum up, such is the uncertainty about the marginal private to mimic the structure of cap and trade for chemical pollution costs of cutting systemic risk, such is the conviction about of the physical environment, auctioning off “instability the increasing social costs o [...] On the upswing through the misallocation of resources and over- one hand, it gets at the over-indebtedness and more general indebtedness, and in the downswing through fire sales or the misallocation of resources in the real economy that can be rationing of credit and other services.