The effects of bank consolidation on risk capital allocation and market liquidity
In: Market functioning and central bank policy
We investigate the effects of financial market consolidation on the allocation of risk capital in a financial institution and the implications for market liquidity in dealership markets. An increase in financial market consolidation can increase liquidity in foreign exchange and government securities markets. We assume that financial institutions use risk-management tools in the allocation of risk capital and that capital is determined at the firm level and allocated among separate business lines or divisions. The ability of market makers to supply liquidity is influenced by their risk-bearing capacity, which is directly related to the amount of risk capital allocated to this activity. 2006 The Southern Finance Association and the Southwestern Finance Association.
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