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Commentary on Institutions and Policies for Maintaining Financial Stability.” Pp. 299-306 in Maintaining Financial Stability in a Global

By Randall S. Kroszner

Abstract

Robert Litan has written an excellent analysis of the challenges to maintaining financial stability and of alternative approaches to achieving this goal. Litan advocates largely abandoning the emphasis on the traditional “prevention-safety net ” paradigm in which regulation attempts to shelter depository institutions from competition, restrict their activities, and provide implicit or explicit guarantees against losses through the lender of last resort and deposit insurance. This approach, Litan argues, is not only “being outmoded by market competition ” but also “addictive and seductive. ” This type of regulation has undermined market discipline and has neither prevented banking crises nor provided safety to the financial system. Litan offers the “competition-containment ” approach as a means of improving financial regulation and financial stability. While this approach encompasses varied elements, the main thrust is to increase reliance on market discipline and to make regulation complementar

Year: 1997
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