Then I will identify two important issues raised by the implementation of this regime that need the attention of academics, analysts, and policymakers if we are to regulate systemic risk effectively and efficiently.1 Distressed firms and systemic risk Let me start by detailing how distress in a financial firm can create risks to overall financial stability, as a prelude to suggesting how an understanding of those dynamics should inform prudential regulatory policies.
There are basically four ways:   First is the classic domino effect, whereby counterparties of a failing firm are placed under severe strain when the firm does not meet its financial obligations to them. Their resulting inability to meet their own obligations leads, in turn, to severe strains at their other significant counterparties, and so on through the financial system.