Resource title

Regulations of Banking Groups

Resource image

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Resource description

We study the optimal regulation of banking groups ("banks”), taking both minimum capital requirements and legal structure into account. A bank can set up either as one legal unit facing limited liability jointly (branch structure) or as a bank holding company with subsidiaries (subsidiary structure). Banks are exposed to risk from their unobservable asset choices and to exogenous risk from their environment. We show that banks with branches are more prudent in normal times than banks with subsidiaries, but are also less prudent when problems arise. A regulator that observes banks’ exogenous risk should optimally determine both capital requirements and legal structure. If the exogenous risk is private information to banks, it can be optimal to screen banks according to risk by setting capital requirements appropriately, and letting banks choose their legal structure.

Resource author

Thomas Harr, Thomas Rønde

Resource publisher

Resource publish date

Resource language

eng

Resource content type

application/pdf

Resource resource URL

http://hdl.handle.net/10398/7708

Resource license

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