As a form of negative externality, a natural economic response to systemic risk is to look to taxation to correct it. However, we argue in this paper that the problem of systemic risk is not a standard externality problem. First, a 'polluter pays' approach is inapplicable because the polluter is...

Regulation that is designed to enhance the stability of individual financial institutions, micro-prudential regulation, can create and exacerbate systemic instability. This is particularly true of detailed prescriptive rules about corporate governance which are prone to incorrect specification...