Institutions for Financial stability

I hasd mentioned earlier that most academicians keep their best for the Jackson Hole symopsium . I have covered quite a few papers from the 2007 symposium that focused on housing.

I came across this paper from Rovert Litan presented in 1997 symposium which focused on financial stability. The paper is quite good and relevant for even today. His broad idea is:

In brief, my main message is to urge a shift in emphasis from what I call the “prevention-safety net” approach to maintaining financial stability that has characterized U.S. policy since the Depression toward what I label the “competition-containment” paradigm that I submit should govern policy in the future. The post-Depression prevention model has attempted to ward off systemic danger in large part by sheltering individual depository institutions from competition, an approach that has failed, has been costly to consumers, and in any event, is being outmoded by market developments. The safety nets—deposit insurance and emergency liquidity provided by the Federal Reserve—have been more successful in preventing and containing financial crises, but can be both addictive and seductive, causing institutions and policymakers alike to tolerate excessive risks that are damaging to taxpayers who foot the bill for the safety nets.

He has stressed on the importance of Clearing and Settlement systems for making the financial system better and more efficient.


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