This paper discusses the role of an examination of incentives in identifying potential vulnerabilities that could result in instability in a financial system. While economic analysis has emphasized the critical importance of incentives in determining behavior, the assessments of financial systems and the adequacy of financial regulations have not so far taken account of incentive structures in any systematic way. 2 We argue in this paper that an approach that focuses on the assessment of incentives of the main agents in a financial system should be one of the key elements in the analysis of financial system vulnerabilities and the surveillance over financial systems. We outline a diagnostic approach similar to that employed in many other branches of scientific investigation, such an approach highlights the need for additional research on the relationship between institutional structures and financial vulnerabilities
Bibliography
Includes bibliographical references (page 19)
Notes
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