Kasinomics

Trilemma in financial supervision - Schoenmaker, Oosterloo

Dirk Schoenmaker and Sander Osterloo from the Dutch Finance Ministry have written an article about Cross-border issues in European financial supervision as part of the book on the Structure of Financial Regulation by David G Mayes and Geoffrey E Wood.

At the beginning of their article, they point to the fundamental trilemma of financial supervision. They sait that only two out of these three incompatible objectives can be achieved:

1. Stable financial system.
2. Integrated financial market.
3. Independent national financial supervision.

The authors also define contagion as shocks which propagate from one financial institution to the other by two channels (p. 266):

• Exposure channel: domino effects resulting from real exposures in the interbank markets and/or in payment systems.
• Information channel: contagious withdrawals (bank run) when depositors are imperfectly informed about the type of shocks hitting banks and about their physical exposure to each other (asymmetric information)

See also

• Mayes, Wood: “The Structure of Financial Regulation”
• Role of the Central Bank in Financial Supervision - Article by Goodhard
• Pro-Cyclicality - Discussion of the problem and possible solutions
• Thoughts on transnational networks of private international bodies in the financial architecture
• The need for systemic risk
• Systemic Risk - Discussion by Alexander, Eatwell, Dhumale
• Project: Mapping the Financial Governance
• Intergovernmentalism in Financial Regulation
• Discussion of 2008 FSF Report on Financial Stability
• Contagion - Definition by Worldbank