An industrial organisation approach to the too-big-to-fail problem.

Abstract

This article suggests a reform of the organisation of money markets that would largely eliminate the risk of contagion. The notion of “systemically important institution” would be replaced by that of systemically important platform”. Such platforms would only be directly accessible to a group of “offi cially recognised financial institutions” that would have to comply with special regulatory requirements and would be directly supervised by the central bank. The status of “offi cially recognised fi nancial institution” could be revoked by the central bank if these special regulatory requirements are not satisfi ed. A special resolution procedure would be created for these institutions, so that the central bank has the legal powers to close it down, or at least restrict its activities before it is too late. OTC markets would still be active but, since they would be penalised by regulation, it is likely that they would become small, and therefore not in a position to jeopardise the entire system.