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Essays on financial fragility and regulation

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  • Ma, K.

    (Tilburg University)

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    Abstract

    Abstract: This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous leverage, thus clarifying a number of apparently contradictory empirical results. Chapter 4 presents a model where fire-sales and bank runs are self-fulfilling and mutually reinforcing. With endogenous fire sale prices, the model delivers two new policy insights: First Bank capital can have unintended consequences on illiquidity and contagion, and therefore is not a panacea for financial stability. Second, as acknowledging a crisis aggravates financial contagion, full commitment to regulatory transparency can be suboptimal from a social welfare point-of-view. Chapter 5 is devoted to antitrust policy. It studies how cost asymmetry affects the effectiveness of corporate leniency programs. The analysis shows that using leniency programs involves a trade-off between ex-ante deterrence and ex-post efficiency. For traditional antitrust investigation can both deter cartels and improve allocation, leniency programs should be viewed as a second best solution for budget-constrained antitrust authorities.

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    Bibliographic Info

    Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-5930085.

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    Date of creation: 2013
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    Publication status: Published
    Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-5930085

    Note: Dissertation
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    Web page: http://www.tilburguniversity.edu/

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    1. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
    2. Eduardo Levy Yeyati & Alejandro Micco, 2003. "Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk," Research Department Publications 4353, Inter-American Development Bank, Research Department.
    3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    4. Spagnolo, Giancarlo, 2004. "Divide et Impera: Optimal Leniency Programmes," CEPR Discussion Papers 4840, C.E.P.R. Discussion Papers.
    5. Helder Vasconcelos, 2005. "Tacit Collusion, Cost Asymmetries, and Mergers," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 39-62, Spring.
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