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    Prudential Discipline for Financial Firms: Micro, Macro, and Market Structures

    Wall, Larry D. | December 2009
    Abstract
    The recent global financial crisis reflects numerous breakdowns in the prudential discipline of financial firms. This paper discusses ways to strengthen micro- and macroprudential supervision and restore credible market discipline. The discussion notes that microprudential supervisors are typically assigned a variety of goals that sometimes have conflicting policy implications. In such a setting, the structure of the regulatory agencies and the priority given to prudential goals are critical to achieving those goals. The analysis of macroprudential supervision emphasizes that this supervisor must be both bold and modest: bold in seeking to understand the sources and distributions of systemically important risks, and modest about what a supervisor can do without imposing overly restrictive regulations. Finally, the paper argues that the primary responsibility for risk management must rest with firms, not with government supervisors. Unfortunately, systemic risk concerns have led governments to shield the private sector from the full losses that dull their incentive to discipline risk taking. This section of the paper suggests that deposit insurance reform, special resolutions for systemically important firms, and requiring firms to plan for their own resolution and contingent capital may all have a role to play in restoring effective market discipline.
    Citation
    Wall, Larry D.. 2009. Prudential Discipline for Financial Firms: Micro, Macro, and Market Structures. © Asian Development Bank. http://hdl.handle.net/11540/3764. License: CC BY 3.0 IGO.
    Keywords
    Macroeconomic
    Macroeconomic Analysis
    Performance Evaluation
    Impact Evaluation
    Economic indicators
    Growth models
    Gross domestic product
    Macroeconomics
    Economic forecast
    Exports
    Economic development projects
    Economic policy
    Economic forecasting
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    Citable URI
    http://hdl.handle.net/11540/3764
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    Author
    Wall, Larry D.
    Theme
    Economics
    Evaluation
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise