Academic

Schwarcz on Systemic Risk

By Lawrence Solum

Steven L. Schwarcz (Duke University School of Law) has posted Systemic Risk (Georgetown Law Journal, Vol. 91, No. 1, 2008) on SSRN. Here is the abstract:

Governments and international organizations worry increasingly about systemic risk, under which the world's financial system can collapse like a row of dominoes. There is widespread confusion, though, about the causes and even the definition of systemic risk, and uncertainty about how to control it. This article offers a conceptual framework for examining what risks are truly systemic, what causes those risks, and how, if at all, those risks should be regulated. Scholars historically have tended to think of systemic risk primarily in terms of financial institutions such as banks. However with the growth of disintermediation, in which companies can access capital market funding without going through banks or other intermediary-institutions, greater focus should be devoted to financial markets and the relationship between markets and institutions. This perspective reveals that systemic risk results from a type of tragedy of the commons in which market participants lack sufficient incentive, absent regulation, to limit risk taking in order to reduce the systemic danger to others. Law therefore has a role in reducing systemic risk.

Full post as published by Legal Theory Blog on March 26, 2008 (boomark / email).