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Bank capital regulation and structured finance

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Author Info

  • Antoine Martin
  • Bruno M. Parigi

Abstract

We construct a model in which bank capital regulation and financial innovation interact. Innovation takes the form of pooling and tranching of assets and the creation of separate structures with different seniority, different risk, and different capital charges, a process that captures some stylized features of structured finance. Regulation is motivated by the divergence of private and social interests in future profits. Capital regulation lowers bank profits and may induce banks to innovate in order to evade the regulation itself. We show that structured finance can improve welfare in some cases. However, innovation may also be adopted to avoid regulation, even in cases where it decreases welfare.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 492.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:492

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Related research

Keywords: Bank capital ; Bank reserves ; Banking law;

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Cited by:
  1. Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2013. "The fragility of short-term secured funding markets," Staff Reports 630, Federal Reserve Bank of New York.
  2. Christian Calmès & Raymond Théoret, 2011. "Bank systemic risk and the business cycle: An empirical investigation using Canadian data," RePAd Working Paper Series UQO-DSA-wp322011, Département des sciences administratives, UQO.

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