Chapter 13

Tail Risk, Regulatory Supervision, and Systemic Risk

Missing Links

Abstract

The regulatory objective is to protect the financial system. Institutional interest is generally described as maximizing financial return to investors. There appears to be a conflict between these objectives. With tail risk in mind, regulators look at an institution's operations and conclude—sometimes subjectively—that some of them are not in the best interest of the institutions, whereas the institution may look at them and conclude them to be important to achieve their profit goals. This conflict arises because the operations are viewed from two apparently different perspectives, despite a common interest to protect the sustainability of the institution. ...

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