Systemic Risks and the Idea of a Resilient ‘Economic Order'

Whilst systemic risks are often merely treated as a specific category of risks in the economic literature, a review of the way they are defined, as well as the fruitless search for a single silver bullet to mitigate such risks, forces us to view systemic risks in the context of the entire financial sector. Here they are a reflection of the general volatility of the financial sector rather than a result of a linear causality. This paper argues that systemic risks (or the failure of the entire system) require not a only a regulatory tool kit, but also a re-conceptualisation of the entire framework regulating the financial sector: from its principles, to the way the rules and instruments work and the way they interact. This paper touches on the ideas of the so-called economic order (Wirtschaftsordnung) and the economic constitution in order to describe the outlines of such a framework. Substantively, it tackles a fundamental problem of law and industrial economics: how to make the system sounder, more robust and more resilient. This robustness and resilience of the system also requires a resilience of the rules and regulatory instruments themselves. Here a theorem and analysis is provided by looking at the interaction of existing rules, the addition of new instruments (Basel IV, CRR II), but also at ways to avoid regulatory and cultural capture and regulatory arbitrage. Last but not least, it will often be legal notions of ‘degree’ and ‘sufficiency’ that determine the effectiveness of regulation in future.