ABSTRACT
Now it is much clear that one of the biggest challenges to contemporary financial regulation is to accommodate the systemic risks. As is studied in the first part of this book, systemic risk arises from various channels, such as the coordinative failure of creditors, the banks’ collective engagement in excess risk taking, and the bank failure spilled over across the web of claims. They are originated from the externalities one bank’s behavior imposed on the others, or the network effect which makes one bank’s trouble contagious. The systemic risk is hardly fixed by the pure market mechanism, since the atomistic financial institutions do not take such externalities and network effect into account when they make their investment decisions.
