Tail risks and contract design from a financial stability perspective
The wider theme of this conference is about what we have learned from the recent crisis. There have been many lessons. Some are not new but just a re-learning of old lore: ‘banks need to hold adequate capital’; ‘real-estate prices can fall dramatically’; ‘financial institutions need to avoid excessive risk taking’. The authorities are pursuing a long list of regulatory initiatives to address the externalities arising from risks in banks and markets, including Dodd-Frank in the US, the European Market Infrastructure Regulation (EMIR) in Europe, the Independent Commission on Banking (ICB) in the United Kingdom and the various Basel capital and liquidity rules internationally. And the Financial Stability Board has taken on a role in co-ordinating much of the other international effort. Academic research also has a large part to play in this process, in both identifying the issues and proposing or evaluating policy responses.
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