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Risk, Leverage, and Regulation of Financial Intermediaries

Wang, Tianxi (2009) Risk, Leverage, and Regulation of Financial Intermediaries. Working Paper. University of Essex, Department of Economics, Economics Discussion Papers 678. (Unpublished)

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Abstract

This paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their profit margins. The paper thus founds capital adequacy regulation upon the market failure and suggests that this regulation should bind not only commercial banks, but all financial intermediaries, including private equities and hedge funds.

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 12 Jul 2012 16:04
Last Modified: 22 Jan 2019 16:15
URI: http://repository.essex.ac.uk/id/eprint/2958

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