Risk shifting and the allocation of capital: A Rationale for macroprudential regulation

Item Type Journal paper
Abstract This paper reconsiders the risk-shifting problem of banks and presents a novel rationale for macroprudential regulation. The interplay between this agency problem and equilibrium investment creates a welfare-reducing pecuniary externality that causes capital misallocation and excessive bank risk taking. Therefore, the banking sector tends to be too large, under-capitalized, and inefficiently risky. This distortion is independent of typical frictions like government guarantees or default costs. Macroprudential regulation with capital requirements or deposit rate ceilings corrects misallocation thereby magnifying rent opportunities for banks to reduce risk shifting. Regulation is, however, no Pareto improvement and causes redistribution from households to bank owners.
Authors Kogler, Michael
Journal or Publication Title Journal of Banking and Finance
Language English
Subjects economics
finance
HSG Classification contribution to scientific community
Refereed Yes
Date 2020
Publisher Elsevier
Number 118
Number of Pages 13
ISSN 0378-4266
Official URL https://www.sciencedirect.com/science/article/pii/...
Depositing User Michael Kogler
Date Deposited 09 Jul 2020 12:10
Last Modified 20 Jul 2022 17:42
URI: https://www.alexandria.unisg.ch/publications/260627

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Kogler, Michael (2020) Risk shifting and the allocation of capital: A Rationale for macroprudential regulation. Journal of Banking and Finance, (118). ISSN 0378-4266

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https://www.alexandria.unisg.ch/id/eprint/260627
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