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Regulating Financial Conglomerates

National Bank of Belgium Working Paper No. 54

25 Pages Posted: 14 Oct 2010  

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Gyongyi Loranth

Centre for Economic Policy Research (CEPR)

Alan D. Morrison

affiliation not provided to SSRN

Hyun Song Shin

Bank for International Settlements

Multiple version iconThere are 4 versions of this paper

Date Written: May 18, 2004

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.

Suggested Citation

Freixas, Xavier and Loranth, Gyongyi and Morrison, Alan D. and Shin, Hyun Song, Regulating Financial Conglomerates (May 18, 2004). National Bank of Belgium Working Paper No. 54. Available at SSRN: https://ssrn.com/abstract=1691575 or http://dx.doi.org/10.2139/ssrn.1691575

Xavier Freixas (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~freixas

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Gyongyi Loranth

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Alan D. Morrison

affiliation not provided to SSRN

No Address Available

Hyun Song Shin

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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