Regulating Financial Conglomerates

Xavier Freixas (), Gyongyi Loranth, Alan Morrison () and Hyun Song Shin
Additional contact information
Xavier Freixas: Universitat Pompeu Fabra
Gyongyi Loranth: London Business School

No 54, Working Paper Research from National Bank of Belgium

Abstract: We analyse a model of financial intermediation in which intermediaries are subject to moral hazard and they do not invest socially optimally, because they ignore the systemic costs of failure and, in the case of banks, because they fail to account for risks which are assumed by the deposit insurance fund. Capital adequacy requirements are designed to minimise the social costs of these effects. We show that banks should always have higher regulatory capital requirements than insurance companies. Contrary to received wisdom, when banks and insurance companies combine to form financial conglomerates we show that it is socially optimal to separate their balance sheets. Moreover, the practice of "regulatory arbitrage", or of transfering assets from one balance sheet to another, is welfare increasing.

Pages: 25 pages
Date: 2004-05
New Economics Papers: this item is included in nep-fin and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Regulating Financial Conglomerates (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200405-10

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