Risk, Leverage, and Regulation of Financial Intermediaries

Tianxi Wang

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their profit margins. The paper thus founds capital adequacy regulation upon the market failure and suggests that this regulation should bind not only commercial banks, but all financial intermediaries, including private equities and hedge funds.

Keywords: Risk; Difference; in; Risk; Preference; Leverage; Regulation; Externality (search for similar items in EconPapers)
JEL-codes: D52 D62 G00 G01 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-bec and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/18212/4/MPRA_paper_18212.pdf original version (application/pdf)

Related works:
Working Paper: Risk, Leverage, and Regulation of Financial Intermediaries (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:18212

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().