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Bank capital regulation and structured finance

Author

Listed:
  • Antoine Martin
  • Bruno 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.

Suggested Citation

  • Antoine Martin & Bruno Parigi, 2011. "Bank capital regulation and structured finance," Staff Reports 492, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:492
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    Cited by:

    1. Wang, Jiamei & Chen, Haibin & Zhang, Heng & Luo, Jianchao & Cheng, Mingwang & Zhang, Jiaping, 2022. "Property rights reform and capital adequacy ratios of rural credit cooperatives in China," Economic Modelling, Elsevier, vol. 106(C).
    2. Martynova, Natalya & Ratnovski, Lev & Vlahu, Razvan, 2020. "Bank profitability, leverage constraints, and risk-taking," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    3. Korkut Alp Erturk, 2019. "Intrinsic Moral Hazard," Working Paper Series, Department of Economics, University of Utah 2019_03, University of Utah, Department of Economics.
    4. Martin, Antoine & Skeie, David & von Thadden, Ernst-Ludwig, 2014. "The fragility of short-term secured funding markets," Journal of Economic Theory, Elsevier, vol. 149(C), pages 15-42.
    5. Natalya Martynova & Mr. Lev Ratnovski & Mr. Razvan Vlahu, 2015. "Bank Profitability and Risk-Taking," IMF Working Papers 2015/249, International Monetary Fund.
    6. Miao, Wenlong & Ma, Yuxian & Xu, Haoran, 2025. "Capital regulation, regulatory avoidance, and bank systemic risk," International Review of Financial Analysis, Elsevier, vol. 100(C).
    7. 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.
    8. Martin Hibbeln & Werner Osterkamp, 2024. "Simple is simply not enough—features versus labels of complex financial securities," Review of Derivatives Research, Springer, vol. 27(2), pages 113-150, July.
    9. Natalya Martynova & Lev Ratnovski & Razvan Vlahu, 2014. "Franchise value and risk-taking in modern banks," DNB Working Papers 430, Netherlands Central Bank, Research Department.

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