public policy; financial regulation; financial risk; ethics; justice; ethics of risk; systemic risk; moral contractualism
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The envisaged research project will investigate systemic financial risk (SFR) from the perspectives of economics, political science and ethics. Its central goal consists in deepening our understanding of SFR in ways that are of use for public-policy makers, in particular as regards the regulation of financial markets. To do so, the project brings together experts in economics, finance, political science/political economy and ethics from the University of Zurich’s Center for Ethics and its Institute for Political Science, the ETH Risk Center and the ETH Department of Humanities, Social and Political Sciences.The phenomenon of financial risk poses complex challenges of imminent importance to public policy makers - challenges that require sophisticated and sustained interdisciplinary cooperation. Due to the recent financial crisis, systemic risk has received considerable attention in various fields. In economics, the topic is approached through inquiry into the nature and determinants of financial bubbles. In political economy, the question how authoritative public regulation may reduce SFR without unduly restricting economic growth has taken center stage. Moral and political philosophers, in turn, have begun to investigate the previously neglected topic of risk ethics, and in particular the ethics of systemic risk as evidenced by such phenomena as global climate change or liberalized financial markets. The project as a whole pursues four overarching goals: The first goal is to conceptualize the idea of SFR. The second is to improve our understanding of the causal pathways through which SFRs take shape. The third is to explore the ethical foundations of regulating SFRs. Only once these three foundational elements are in place can the fourth goal, the most pragmatic and pressing one, be addressed: This goal consists in working towards regulative solutions to the problem of SFR which are both empirically robust and ethically sound.Although significant inroads have been made to address SFR, one obstacle has been a lack of clarity when it comes to defining systemic risk. Therefore, the first task of this research project consists in delineating a conception of SFR that is theoretically and philosophically sound and can be employed across different disciplines and contexts. Developing such a conceptual framework will need to draw on literature in physical science and complexity study, the study of political economy, but also on philosophical analyses. The benefits of advancing and refining the typology of SFR will enable researchers inquiring into any kind of systemic risk issue to differentiate more thoroughly and to communicate more effectively with those working on other forms of risk. The second goal of the project is to improve our empirical understanding of the factors that collectively determine the level of SFR. An analysis of the causal determinants is necessary to make any normative approach relevant for actual regulatory decision-making. Two aspects seem especially pertinent here: First, classifying the kinds of actors and institutions that contribute to SFR. It is, after all, to these institutions that adequate regulatory solutions must be addressed. Second, developing reliable indicators of the level of systemic fragility that prevail in the financial market at any given time. A key feature of SFR is that perceptions of systemic relevance are crucial because they generate feedback loops and give rise to considerable complexity. Our team of experienced researchers will apply some of the models and methods they have developed for other social systems in new ways to financial markets. This method, in combination with detailed assessment of recent macro-prudential regulatory approaches in political economy, offers a novel approach to determining which institutions are systemically relevant and how they may be regulated.The third part of the research project studies the ethical difficulties that SFR gives rise to, i.e. what kinds and which levels of SFR are ethically defensible? We depart from the assumption that any convincing response must include morally relevant actors beyond outcomes measured in aggregate (economic) welfare. Even if we abstract away from the specific issue of systemic risk exposure, there is currently no convincing ethical theory that offers such an account. The approach that we consider most promising is a form of moral contractualism: such an approach can coherently account for some of the core non-consequentialist intuitions about SFR. We argue that this approach yields a principle of collective due care, according to which agents who have a high impact on systemic financial stability bear special responsibility to ensure the innocuousness of their current products and practices. Thus, the philosophical aim of this project workstream is (i) to formulate and defend a plausible contractualist ethics of SFR, and (ii) to work out the way in which it can help to guide public policy choices.