Risk Shifting with Fuzzy Capital Constraints

Simon Dubecq, Benoit Mojon and Xavier Ragot
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Simon Dubecq: Centre de recherche de la Banque Centrale européenne - Banque Centrale Européenne

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Abstract: We construct a model where risk shifting can be moder-ated by capital requirements. Imperfect information about the level of capital per unit of risk, however, introduces uncertaintyabout the risk exposure of intermediaries. Over-estimation ofthe capital held by financial intermediaries, or the extent ofregulatory arbitrage, may induce households to wrongly infer from higher asset prices that the fundamentals of risky assets have improved. This mechanism can notably explain the lowrisk premia paid by U.S. financial intermediaries between 2000 and 2007 in spite of their increased exposure to risk through higher leverage. Moreover, the lower the level of the risk-free interest rate, the more risk is under-estimated

Keywords: Risk shifting; Capital requirements (search for similar items in EconPapers)
Date: 2015-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03473718
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Citations: View citations in EconPapers (9)

Published in International Journal of Central Banking, 2015, 11 (1), pp.71 - 101

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Related works:
Journal Article: Risk Shifting with Fuzzy Capital Constraints (2015)
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03473718

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