Regulating financial conglomerates

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Freixas, Xavier; Lóránth, Gyöngyi; Morrison, Alan D.. Regulating financial conglomerates. 2005
To cite or link this document: Freixas, Xavier Lóránth, Gyöngyi Morrison, Alan D.
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa 2005-03-01
dc.description.abstract We investigate the optimal regulation of financial conglomerates which combine a bank and a non-bank financial institution. The conglomerate’s risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerate’s liability strucure. We examine optimal capital requirements for standalone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their standalone or decentralised equivalent. However, when risk profiles are endogenously selected conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralised conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of “regulatory arbitrage”, or of transfering assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 820
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.title Regulating financial conglomerates
dc.type info:eu-repo/semantics/workingPaper 2014-06-03T07:14:12Z
dc.subject.keyword Business Economics and Industrial Organization
dc.subject.keyword Finance and Accounting
dc.subject.keyword financial conglomerate
dc.subject.keyword capital regulation
dc.subject.keyword regulatory arbitrage
dc.rights.accessRights info:eu-repo/semantics/openAccess

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