The Beneficial Coexistence of Banks and Markets: The Role of Capital Requirements and Underwriting

24 Pages Posted: 11 Nov 2012

See all articles by Swarnava Biswas

Swarnava Biswas

University of Bristol

Kostas Koufopoulos

University of Warwick - Finance Group

Date Written: November 11, 2012

Abstract

We propose a model of financial system architecture that highlights the positive interaction between banks and markets in a setting where each agent believes that she can evaluate information better than any other agent. Banks emerge endogenously and their interaction with markets is facilitated by the use of underwriting and regulatory capital requirements. Bank Capital reassures market investors that the underwriting contract will be fulfilled. The profits they make on underwriting enable banks to fund more projects in the future. Thus, a complementarity loop is achieved which results in the financing of positive NPV projects that were previously denied credit.

Keywords: Bank Capital Requirements, Co-evolution of Banks and Markets, Diversity of Opinion

JEL Classification: G21, G22

Suggested Citation

Biswas, Swarnava and Koufopoulos, Kostas, The Beneficial Coexistence of Banks and Markets: The Role of Capital Requirements and Underwriting (November 11, 2012). WBS Finance Group Research Paper No. 194, Available at SSRN: https://ssrn.com/abstract=2174102 or http://dx.doi.org/10.2139/ssrn.2174102

Swarnava Biswas

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Kostas Koufopoulos (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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