Risk, Leverage, and Regulation of Financial Intermediaries
AbstractThis paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their profit margins. The paper thus founds capital adequacy regulation upon the market failure and suggests that this regulation should bind not only commercial banks, but all financial intermediaries, including private equities and hedge funds.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 18212.
Date of creation: Jun 2009
Date of revision:
Risk Difference in Risk Preference Leverage Regulation Externality;
Other versions of this item:
- Tianxi Wang, 2009. "Risk, Leverage, and Regulation of Financial Intermediaries," Economics Discussion Papers 678, University of Essex, Department of Economics.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- G00 - Financial Economics - - General - - - General
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-31 (All new papers)
- NEP-BEC-2009-10-31 (Business Economics)
- NEP-REG-2009-10-31 (Regulation)
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