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Contagion, Bankruptcy and Social Welfare Analysis in a Financial Economy with Risk Regulation Constraint

  • Aloísio P. Araújo
  • José Valentim M. Vicente

In the last years, regulatory agencies of many countries in the world, following recomendations of Basel Committee, have compeled financial institutions to maintain a minimum capital requirements to cover market and credit risks. This paper investigates the consequences about social welfare, contagion and the bankruptcy probability of such practice. We show that for each financial institution there is a level of regulation that maximizes its utility. Another important result asserts that risk regulation decreases contagion and under certain conditions can reduce the bankruptcy probability. We also analyze the trade-off faced by regulators involving the financial institutions welfare versus bankruptcy and contagion probabilities.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps118.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 118.

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Date of creation: Oct 2006
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Handle: RePEc:bcb:wpaper:118
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. José Fajardo & Aquiles Farias, 2002. "Generalized Hyperbolic Distributions and Brazilian Data," Working Papers Series 52, Central Bank of Brazil, Research Department.
  2. Ryan A. Compton & Jose Ricardo da Costa e Silva, 2005. "Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching," Working Papers Series 97, Central Bank of Brazil, Research Department.
  3. Bonomo, M. A. & Brito, R.D., 2001. "Regras Monetárias e Dinâmica Macroeconomica no Brasil: uma abordagem de expectativas racionais," Insper Working Papers wpe_11, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  4. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2002. "Speculative Attacks on Debts, Dollarization and Optimum Currency Areas," Economics Working Papers (Ensaios Economicos da EPGE) 446, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  5. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
  6. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  7. Ricardo Schechtman & Valéria Salomão Garcia & Sergio Mikio Koyama & Guilherme Cronemberger Parente, 2004. "Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis," Working Papers Series 91, Central Bank of Brazil, Research Department.
  8. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  9. Pedro H. Albuquerque, 2005. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Public Economics 0511020, EconWPA, revised 26 Nov 2005.
  10. Maurício S. Bugarin & Fabia A. de Carvalho, 2005. "Comment on Market Discipline and Monetary Policy by Carl Walsh," Working Papers Series 95, Central Bank of Brazil, Research Department.
  11. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  12. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
  13. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  14. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2003. "Speculative attacks on debts and optimum currency area: A welfare analysis," Economics Working Papers (Ensaios Economicos da EPGE) 514, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  15. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  16. Francisco Marcos R. Figueiredo & Roberta Blass Staub, 2001. "Algumas Considerações Sobre a Sazonalidade no IPCA," Working Papers Series 31, Central Bank of Brazil, Research Department.
  17. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
  18. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
  19. Marta Areosa & Waldyr Areosa, 2006. "The Inequality Channel of Monetary Transmission," Working Papers Series 114, Central Bank of Brazil, Research Department.
  20. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  21. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
  22. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department.
  23. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
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