Financial System Architecture and Systematic Risk

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

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

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.

Keywords: Banking; Financial System; Systematic Risk; Global Games. (search for similar items in EconPapers)
JEL-codes: C72 E44 G21 G28 O16 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2018-06
New Economics Papers: this item is included in nep-knm and nep-mac
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