¹Lecturer at the Department of Economics, Jamia Millia Islamia (Central University), New Delhi, India

^*I am grateful to the faculty members of the Department of Economics, Jamia Millia Islamia, New Delhi for helpful advise. I am thankful to Julian Arkell and the Geneva Association for the support and suggestions.

Abstract

The paper reviews the sources of market failure in financial institutions and markets and what can be done to alleviate them. It examines game–theoretic explanations for financial instability, in particular the role of asymmetric information in generating destabilizing behaviour. In the area of remedies, the paper analyses the potential contribution of official safety nets and what can be done to minimize the associated moral hazard. In this context, it discusses the role of regulation and transparency.