the network in one part of the grid from causing a blackout throughout all houses connected through the network. Taxing liabilities As described above, many economists believe that financial fragility arises when financial agents such as banks take on too many or too illiquid liabilities relative to the liquidity of their assets. Note that asset liquidity is also a function of the degree of stable funding available to market participants. As a result, the reliance on cheap short term funding creates a negative risk externality (Perotti and Suarez, 2011). Some economists propose that the government tax or limit such liabilities to reduce such excessive risk-taking. Perotti and Suarez (2009) proposed prudential Pigouvian charges on unstable short term funding, while Shin (2010) targets unstable foreign flows. Others have supported this approach. Capital requirements Another form of financial regulation designed to reduce financial fragility is to regulate bank's balance sheets directly via capital requirements. References Financial problems