The 2008 financial crisis sent shockwaves through the banking sector and major economies around the globe. It also negatively affected the socio-economic wellbeing of many members of society who contribute little or even nothing to the processes and behavioural patterns that led to the crisis. In the aftermath of the crisis, systemic risk was famously identified as the primary aspect neglected by mainstream macroeconomists ahead of the 2008 crash.

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This project is premised on the view that the phenomenon of systemic risk goes to the core of contemporary problems of social injustice. The project has four key aims/tasks:

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First, we will develop a normative theory of systemic risk, using the civic republican idea of “non-domination” as a key indicator for when systemic risks become morally problematic. Non-domination sees the basic social freedom of an individual as violated if other people impose uncontrollable obstacles to their plans. We will use normative theory to devise a range of acceptability thresholds and identify when hypothetical distributional outcomes would breach those criteria. This will involve constructing a multi-dimensional value base (including overall harm, probability, distribution of harm and vulnerability of the most affected).

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Second, based on econometric estimations of the distributional costs stemming from the 2008 crisis in the US and UK, we will chart the impact of the crisis on the most vulnerable members of society and the bottom 30% of the income scale. In addition to our own econometric analysis, we will also study existing data sets from other disciplines (such as sociology and political science) to assess the complex and interrelated effects of the crisis on different groups in society.

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Third, based on this normative theory of systemic risk and our econometric analysis of the effects of the crisis on the socially most disadvantaged members of society, the project will assess and (re-)calibrate regulatory instruments for governing and managing systemic risk. As part of this task, we will investigate whether instruments such as countercyclical capital buffers and loan-to-value & loan-to-income ratios can be targeted for reducing systemic risk. We will also see if these targets can be used to reduce the likelihood of instances of unjust risk imposition according to the acceptability thresholds identified in task 1.

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Fourth, we aim to provide an outline of some basic principles for a new macroeconomic social contract between market players, public authorities and the population at large. We will also explore how such a social contract could be legally enshrined and given legal presence.

Overall, we aim to provide the first comprehensive normative theory of systemic risk and to build, based on a mixed methods approach which includes normative theory building, ethical policy analysis, econometrics and secondary data analysis, a set of policy proposals and guidelines for regulators, market players and decision-makers.