The Structural Solution to Systemic Risk
Chapter 8 examines regulators’ ‘structural’ approach to systemic risk. Ex post regulatory schemes are designed to ensure an orderly wind down of failing financial conglomerates. These include the ‘single point of entry’ and ‘bail-in’ capital requirements; Dodd-Frank’s Orderly Liquidation Authority resolution regime; and resolution plans, or ‘living wills’. The UK and EU have their own versions of these three components. The chapter then turns to ex ante regulation of firms as going concerns designed to limit the impact of risky non-bank activities on depository affiliates. Unlike the ex post approach, global consensus does not prevail concerning going concern structural regulation. The ex ante approach includes the Volcker rule (US) and the Vickers ringfencing reform (UK). For each regulatory area covered, the chapter discusses the associated risk management and compliance requirements.