CHAPTER 11 Systemic risks and macroprudential regulation

DOI: 10.4324/9780429356773-15

11.1 Introduction

11.1.1 Why Is Banking Regulation Special?

Banks, as firms in other industries, are subject to regulation. Compared with other industries, banks are rather heavily regulated, for reasons which are probably obvious. As we have shown in the previous chapters, banks eliminate financial frictions and improve social welfare, and banks also create failures that cannot be solved by themselves. Therefore, in principle, regulation is needed wherever banks fail to discipline themselves: regulators must create and enforce the rules of game for all banks, making sure that all banks comply with legal requirements on their businesses; regulators must ...

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