Market-Based Systemic Risks and Safety Nets

Growth of the shadow banking sector led to the outbreak of market-based systemic risks in the latest financial crisis, rendering insufficient the traditional crisis management regime, which primarily focused on the bank-based systemic risks. The Dodd-Frank Act does attempt to address this new type of systemic risk by extending bank-like regulations and resolution mechanisms to non-bank SIFIs. The Act does not, however, extend safety nets such as access to the central bank discount window and deposit insurance to non-banks. Referencing the recently proposed Systemic Emergency Insurance Fund as well as Japan's experience, this paper argues the case for extending safety nets to non-banks