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Financial System Architecture and Systematic Risk

Author

Listed:
  • José Jorge

    (Faculdade de Economia, Universidade do Porto, cef.up)

Abstract

In an imperfect information economy with investment complementarities, market-based financial systems suffer from excessive volatility which leads to underinvestment. When financial intermediaries offer returns with low risk, intermediation improves coordination among investors, thereby enhancing efficiency and stabilizing the economy against macroeconomic shocks, entailing an ex ante Pareto improvement compared to the market-based allocation. However, the position of the intermediaries is fragile and competition from financial markets constrains intermediaries so that they have no incentives to improve the market allocation. Possible solutions to this problem and the optimal design of regulation are discussed. Other types of financial architecture, in which intermediation does not play a stabilizing role, are investigated.

Suggested Citation

  • José Jorge, 2018. "Financial System Architecture and Systematic Risk," CEF.UP Working Papers 1805, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:cetedp:1805
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    File URL: http://cefup.fep.up.pt/uploads/WorkingPapers/wp1805.pdf
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    More about this item

    Keywords

    Banking; Financial System; Systematic Risk; Global Games.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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