de la Torre, AugustoIze, Alain2012-03-192012-03-192009-02-01https://hdl.handle.net/10986/4118The Subprime crisis largely resulted from failures to internalize systemic risk evenly across financial intermediaries and recognize the implications of Knightian uncertainty and mood swings. A successful reform of prudential regulation will need to integrate more harmoniously the three paradigms of moral hazard, externalities, and uncertainty. This is a tall order because each paradigm leads to different and often inconsistent regulatory implications. Moreover, efforts to address the central problem under one paradigm can make the problems under the others worse. To avoid regulatory arbitrage and ensure that externalities are uniformly internalized, all prudentially regulated intermediaries should be subjected to the same capital adequacy requirements, and unregulated intermediaries should be financed only by regulated intermediaries. Reflecting the importance of uncertainty, the new regulatory architecture will also need to rely less on markets and more on "holistic" supervision, and incorporate countercyclical norms that can be adjusted in light of changing circumstances.CC BY 3.0 IGOACCOUNTABILITYACCOUNTINGADVERSE SELECTIONAGENCY PROBLEMAGENCY PROBLEMSARBITRAGEASSET MANAGERSASSET PRICEASSET PRICESASYMMETRIC INFORMATIONBAILOUTSBALANCE SHEETBALANCE SHEETSBANK EARNINGSBANK FAILUREBANK FAILURE RESOLUTIONBANKING SECTORBANKING SYSTEMBIDBORROWERBROKERAGEBROKERAGE ACTIVITIESBROKERSBUSINESS CYCLEBUSINESS OPPORTUNITIESCAPITAL ADEQUACYCAPITAL FLOWSCAPITAL MARKETCAPITAL MARKETSCAPITAL RATIOSCAPITAL REQUIREMENTSCENTRAL BANKCENTRAL BANKSCHANNEL OF FINANCECOLLECTIVE ACTIONCOMMERCIAL BANKINGCOMMERCIAL BANKSCONSOLIDATED SUPERVISIONCONSUMER PROTECTIONCONTRACT ENFORCEMENTCOORDINATION FAILURECOORDINATION FAILURESCREDIT CHAINCREDIT DEFAULTCREDIT DEFAULT SWAPSCREDIT DERIVATIVESCREDIT ENHANCEMENTSCREDIT LINESCREDIT MARKETCREDIT RISKCREDIT RISK EXPOSURESCREDITWORTHY BORROWERSDEBTDEBT CONTRACTSDEPOSITDEPOSIT INSURANCEDEPOSIT RATESDEPOSITORDEPOSITORSDEPOSITSDEREGULATIONDERIVATIVEDERIVATIVE CONTRACTSDERIVATIVE MARKETSECONOMIC CONDITIONSEFFECTIVE GOVERNANCEEQUITY INVESTMENTSEQUITY SWAPSEXCHANGE RATEEXPOSUREEXTENSION OF CREDITEXTERNALITIESFAIR VALUEFEDERAL RESERVEFEDERAL RESERVE SYSTEMFINANCIAL CONGLOMERATESFINANCIAL CONTRACTSFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEEPENINGFINANCIAL DEVELOPMENTFINANCIAL DEVELOPMENTSFINANCIAL DISTRESSFINANCIAL FLOWSFINANCIAL INNOVATIONFINANCIAL INSTITUTIONSFINANCIAL INTERMEDIARIESFINANCIAL MANAGEMENTFINANCIAL MARKETFINANCIAL MARKET PARTICIPANTSFINANCIAL MARKETSFINANCIAL REGULATIONFINANCIAL SECTORFINANCIAL STABILITYFINANCIAL SYSTEMFINANCIAL SYSTEMSFRAUDGOVERNANCE ISSUESGOVERNANCE STANDARDSGOVERNMENT INTERVENTIONHEDGE FUNDSHOLDINGHOUSINGHOUSING FINANCEHOUSING PRICESINFLATIONINFORMATION ASYMMETRYINFORMED INVESTORSINSTRUMENTINSURANCEINSURANCE COMPANIESINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL ECONOMICSINVESTINGINVESTMENT BANKINGINVESTMENT BANKSINVESTMENT OPPORTUNITIESINVESTMENT VEHICLESINVESTOR PROTECTIONLEGISLATIONLENDER-OF-LAST-RESORTLENDERSLEVYLIMITED LIABILITYLIQUID ASSETSLIQUID SECONDARY MARKETSLIQUIDITYLIQUIDITY CRISESLIQUIDITY FACILITIESLIQUIDITY RISKLOANMALFEASANCEMANDATESMARKET DEVELOPMENTMARKET DISCIPLINEMARKET FAILUREMARKET FAILURESMARKET LIQUIDITYMARKET PARTICIPANTSMARKET PLAYERSMARKET RISKSMARKET VALUESMARKET-MAKINGMATURITYMATURITY GAPMATURITY MISMATCHESMATURITY STRUCTUREMONETARY AUTHORITIESMONETARY POLICYMORAL HAZARDMORTGAGEMORTGAGE LENDINGMORTGAGE-BACKED SECURITIESMORTGAGESMUTUAL FUNDSNEW MARKETSOPPORTUNISTIC BEHAVIOROVERNIGHT REPOSPENSIONPENSION FUNDSPOLICY RESPONSESPORTFOLIOPORTFOLIOSPRICE RISKPRICE VOLATILITYPRINCIPAL-AGENT PROBLEMPRINCIPAL-AGENT PROBLEMSPRUDENTIAL REGULATIONPRUDENTIAL REGULATIONSPRUDENTIAL REQUIREMENTSPRUDENTIAL STANDARDSPUBLIC FUNDSPUBLIC LENDERPUBLIC POLICYRATING AGENCIESREAL SECTORREGULATORREGULATORSREGULATORY FORBEARANCEREGULATORY FRAMEWORKREGULATORY REQUIREMENTSREPAYMENTREPAYMENTSREPUTATIONRETURNSRISK AVERSIONRISK MANAGEMENTRISK MANAGERSRISK PREMIUMRISK TAKINGRISK WEIGHTRISK WEIGHTSRISKY ASSETSSAFETY NETSALE OF MORTGAGESAVINGSSECURITIESSECURITIES MARKETSECURITIES MARKETSSHAREHOLDERSSHORT-TERM LIABILITIESSMALL BORROWERSOCIAL COSTSOCIAL COSTSSOCIAL RISKSSTOCK MARKETSTOCK MARKET PRICESTOCK PRICESSTOCK TRADINGSTOCKSSWAPSYSTEMIC RISKSYSTEMIC RISKSTRADINGTRADITIONAL BANKINGTRANCHESTRANSACTIONTRANSACTION COSTSTRANSPARENCYTREASURYUNDERLYING ASSETUNIVERSAL BANKINGVALUATIONSWHOLESALE FINANCEWHOLESALE INVESTORSWorld Bank10.1596/1813-9450-4842