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dc.contributor.authorFreixas, X
dc.contributor.authorLoranth, G
dc.contributor.authorMorrison, AD
dc.date.accessioned2010-05-20T11:41:18Z
dc.date.available2010-05-20T11:41:18Z
dc.date.issued2007-10
dc.identifier.citationJEL classification: G21, G22, G28
dc.identifier.issn1042-9573
dc.identifier.urihttp://www.dspace.cam.ac.uk/handle/1810/225172
dc.description.abstractWe 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 structure. We examine optimal capital requirements for stand-alone 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 stand-alone or decentralized 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 transferring 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.
dc.language.isoen
dc.publisherElsevier BV
dc.relation.ispartofseriesCFAP Working Paper
dc.relation.ispartofseries19
dc.rightsAll Rights Reserved
dc.rights.urihttps://www.rioxx.net/licenses/all-rights-reserved/
dc.subjectfinancial conglomerate
dc.subjectcapital regulation
dc.subjectregulatory arbitrage
dc.titleRegulating financial conglomerates
dc.typeWorking Paper
dc.type.versionpublished version
prism.publicationNameJ FINANC INTERMED
rioxxterms.versionofrecord10.1016/j.jfi.2007.03.004
dc.identifier.eissn1096-0473


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