Kasinomics

Financial stability – a public good?

When defining Financial Stability, the authors of the book on “Global Financial Governance” stated that financial stability is a “public good [which] will never be provided adequately by the market without regulatory intervention” (p. 18).

In the traditional meaning, a public good does not necessarily need public intervention or regulation, it can be provided by markets if some market participants are willing to bear the costs. In fact, throughout modern history, financial stability has been provided by market participants as often as by governments. For instance, before the introduction of the US Federal Reserve Bank, large banks such as JP Morgan acted as Lender of last ressort when other systemically important banks were threatened to fail.

Financial stability is also not “non-excludable”. Even in globalized financial markets financial stability can be restricted to certain legislations. Admittedly, financial stability needs to provided on the global level to be effective because contagion mechanisms can undermine the efforts of creating zones of financial stability. Financial stability is not a black-and-white-public good, which can only be provided or not provided. Financial stability can be provided to a certain degree, and the choice of degree excludes certain actors in the financial systems.

See also

• Global Financial Governance – Definitions by Alexander, Eatwell and Dhumale
• Alexander, Dhumale, Eatwell: “Global Governance of Financial Systems”
• The need for systemic risk
• Systemic Risk – Discussion by Alexander, Eatwell, Dhumale
• Intergovernmentalism in Financial Regulation
• Trilemma in financial supervision – Schoenmaker, Oosterloo
• The mechanisms of the Credit Crisis – George Reismans article
• Pro-Cyclicality – Discussion of the problem and possible solutions
• Overview of 2008 FSF Report on Financial Stability
• Mayes, Wood: “The Structure of Financial Regulation”