How do we prevent the next financial crisis?

Marcus Opp joined Swedish House of Finance in August 2017 from University of California, Berkeley. His research spans dynamic contracting, financial intermediation, and international finance. Most recently, he has been working on the interplay between financial regulation and risk-taking incentives in the financial sector. His work is published in general interest journals like Econometrica and A-field journals such as the Journal of Financial Economics and the Journal of International Economics.

– The recent financial crisis has – once more – illustrated the special role of the financial sector for the functioning of the overall economy. These spillover effects have motivated governments across the world to massively support ailing banks. While such interventions may have prevented an even larger scale of the crisis ex post, it is well understood that the expectation of such policies creates ex-ante distortions. Financial institutions, in particular too-big-to-fail institutions, do not fully internalize the cost of their own failure and, hence, have an incentive to take on more risks than would be socially optimal. In such environments, banks are able to “privatize gains and socialize losses,” implying a major reason for regulating the financial sector in the first place. One of the primary tasks of financial regulation is to mitigate such misalignment of private and social incentives... Read the full interview here.