(Way) Beyond Diamond-Dybvig
The problem with Dodd-Frank, and with Basel III as well, is that they start with the banking system, not the shadow banking system.
Give credit where credit is due. Everyone (I hope) now appreciates that so-called “microprudential” safeguards are not enough, and this is so even if we extend the traditional focus on solvency (capital adequacy) to include also liquidity.
“Macroprudential” safeguards are needed also, to put bounds on the apparent instability of the system as a whole. Everyone says it, but what does it mean?