Bank Capital Regulation and Structured Finance

41 Pages Posted: 12 May 2011 Last revised: 18 Sep 2012

See all articles by Antoine Martin

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Bruno Maria Parigi

University of Padova - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 1, 2011

Abstract

We construct a model in which bank capital regulation and financial innovation interact. Innovation takes the form of pooling and tranching of assets and the creation of separate structures with different seniority, different risk, and different capital charges, a process that captures some stylized features of structured finance. Regulation is motivated by the divergence of private and social interests in future profits. Capital regulation lowers bank profits and may induce banks to innovate in order to evade the regulation itself. We show that structured finance can improve welfare in some cases. However, innovation may also be adopted to avoid regulation, even in cases where it decreases welfare.

Keywords: banking regulation, financial innovation, structured finance

JEL Classification: E58, G28

Suggested Citation

Martin, Antoine and Parigi, Bruno Maria, Bank Capital Regulation and Structured Finance (May 1, 2011). FRB of New York Staff Report No. 492, Available at SSRN: https://ssrn.com/abstract=1837525 or http://dx.doi.org/10.2139/ssrn.1837525

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

Bruno Maria Parigi

University of Padova - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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