On Thursday evening, Prof. Jean Tirole (Toulouse School of Economics) presented the 20th Barcelona GSE Lecture, "Regulating systemic risk," at Banc Sabadell Auditorium in Barcelona.
In his talk, Prof. Tirole examined the many facets of financial stability and the creation of a policy "toolkit" for macro-prudential supervision in the context of government agency mandates, incentives, and behavior.
"Many different phenomena are regrouped under the heading of financial stability," Prof. Tirole said. "The toolkit regulators should use will vary depending on what they think is causing the instability."
Prof. Tirole detailed several types of destabilizing factors including bubbles, foreign exchange, market freezes and fire sales, widespread maturity mismatches, and cross-exposures or contagions. For each type of disruption, he looked at policy tools that governments might apply to try to restabilize the financial system. He concluded that financial stability supervision is an idea whose time has come, but that ambiguities in the division of labor between agencies as well as communication and boundary issues create difficulty when it comes to applying these measures.
As Prof. Alan Krueger (Princeton University) commented during the inaugural lecture last fall, Prof. Tirole observed that politicians may sometimes have the wrong incentives to step in and create or change policies, even if they have identified the destabilizing factors and the right tools to apply. As in the case of the United States presented by Prof. Krueger, Prof. Tirole notes that European agencies are more likely to act once a crisis has already arrived.
"It's very difficult to intervene when things are going well," Prof. Tirole said during the post-lecture discussion with the audience. He also pointed out that, once a crisis has arrived, those who end up getting hurt are the taxpayers, who bear the costs of restabilizing the system.
These were also familiar concerns for his co-author and Barcelona GSE Affiliated Professor Xavier Freixas (UPF and GSE), who introduced Prof. Tirole's lecture and participated in the discussion afterward. Prof. Freixas recently detailed the consequences of bank bailouts for taxpayers in the GSE research video, "Never before have so few owed so much to so many."
Joining Profs. Tirole and Freixas at the plenary table was Prof. Teresa García-Milà (UPF and GSE), a member of the Banc Sabadell board. Founder of the GSE Prof. Andreu Mas-Colell (UPF and GSE), GSE Chairman Prof. Ramon Marimon (EUI, UPF and GSE), Dean of the School Prof. Massimo Motta (ICREA-UPF and GSE), and GSE Research Director Prof. Omar Licandro (IAE and GSE) were among the lecture's audience as well, which included a number of Barcelona GSE affiliated professors, students in the School's master programs, and several master program alumni who took advantage of the evening's event to connect with the GSE community.
About Prof. Jean Tirole
Jean Tirole (PhD, Massachusetts Institute of Technology, 1981) is Scientific Director of IDEI (Institut d'Economie Industrielle), Chairman of the Board of the Toulouse School of Economics, and Annual Visiting Professor of Economics at MIT. His research interests include Industrial Organization, Regulation and Competition Policy, Innovation and Intellectual Property, Insurance, Banking and Finance. Prof. Tirole has served as president of the Econometric Society (1998) and the European Economic Association (2001). He is a past winner of the BBVA Frontiers of Knowledge Award (2009) and co-author with Barcelona GSE Scientific Council member Prof. Bengt Holmström (MIT) of the new book, Inside and Outside Liquidity, published by MIT Press in February 2011. [full biography]