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Governing the banking system: an assessment of resilience based on Elinor Ostrom's design principles

  • Alexander William Salter (a1) and Vlad Tarko (a2)

The problem of financial stability is political and institutional, rather than narrowly economic. To achieve a more resilient financial system, we need to pay attention to the incentives of actors who have the power to act discretionarily, and to the knowledge limitations of such actors in the face of substantial complexity and uncertainty. The literature on polycentric governance and institutional resilience provides key insights that the literature on financial stability has thus far neglected. We offer an analysis based on the “design principles” for robust governance institutions proposed by Nobel laureate Elinor Ostrom. We apply these principles to banking systems and explore under what conditions a banking system can be expected to discover rules that align private incentives with broader financial stability, and generate the necessary knowledge to govern such a complex system. This perspective challenges both “microprudential” and “macroprudential” approaches, which assume a monocentric financial and banking regulator.

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Journal of Institutional Economics
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