Regulating financial conglomerates

Xavier Freixas (), Gyöngyi Lóránth and Alan D. Morrison

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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.

Keywords: Financial conglomerate; capital regulation; regulatory arbitrage (search for similar items in EconPapers)
JEL-codes: G21 G22 G28 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://econ-papers.upf.edu/papers/820.pdf Whole Paper (application/pdf)

Related works:
Journal Article: Regulating financial conglomerates (2007)
Working Paper: Regulating Financial Conglomerates (2005)
Working Paper: Regulating Financial Conglomerates (2005)
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:upf:upfgen:820

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).