Essays on financial fragility and regulation

K. Ma

Research output: ThesisDoctoral ThesisScientific

486 Downloads (Pure)

Abstract

This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous leverage, thus clarifying a number of apparently contradictory empirical results. Chapter 4 presents a model where fire-sales and bank runs are self-fulfilling and mutually reinforcing. With endogenous fire sale prices, the model delivers two new policy insights: First Bank capital can have unintended consequences on illiquidity and contagion, and therefore is not a panacea for financial stability. Second, as acknowledging a crisis aggravates financial contagion, full commitment to regulatory transparency can be suboptimal from a social welfare point-of-view. Chapter 5 is devoted to antitrust policy. It studies how cost asymmetry affects the effectiveness of corporate leniency programs. The analysis shows that using leniency programs involves a trade-off between ex-ante deterrence and ex-post efficiency. For traditional antitrust investigation can both deter cartels and improve allocation, leniency programs should be viewed as a second best solution for budget-constrained antitrust authorities.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Tilburg University
Supervisors/Advisors
  • Castiglionesi, Fabio, Co-promotor
  • Beck, T.H.L., Promotor
  • van Damme, Eric, Promotor
Award date9 Dec 2013
Place of PublicationTilburg
Publisher
Print ISBNs9789056683764
Publication statusPublished - 2013

Fingerprint

Financial regulation
Financial fragility
Trade-offs
Systemic risk
Leniency programs
Leverage
Financial stability
Cartels
Portfolio risk
Unintended consequences
Competition policy
Liquidity risk
Herding
Authority
Empirical results
Bank runs
Insolvency risk
Banking regulation
Cost asymmetry
Contagion

Cite this

Ma, K. (2013). Essays on financial fragility and regulation. Tilburg: CentER, Center for Economic Research.
Ma, K.. / Essays on financial fragility and regulation. Tilburg : CentER, Center for Economic Research, 2013. 216 p.
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Ma, K 2013, 'Essays on financial fragility and regulation', Doctor of Philosophy, Tilburg University, Tilburg.

Essays on financial fragility and regulation. / Ma, K.

Tilburg : CentER, Center for Economic Research, 2013. 216 p.

Research output: ThesisDoctoral ThesisScientific

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AB - This thesis investigates various issues in regulation, with three chapters on financial fragility and banking regulation, and one chapter on competition policy. Chapter 2 studies banks’ herding driven by their need for market liquidity, highlighting a trade-off between systemic risk and liquidity creation. The model also suggests that systemic risk and leverage are mutually reinforcing, offering an explanation of why banks collectively exposed themselves to mortgage-backed securities prior to the crisis, and why the exposure grew when banks were increasingly leveraged using wholesale short-term funding. Chapter 3 examines the possible trade-off between banking competition and financial stability by highlighting banks' endogenous leverage. Competition is shown to affect portfolio risk, insolvency risk, liquidity risk and systemic risk differently. The model leads us to revisit the existing empirical literature using a more precise taxonomy of risk and take into account endogenous leverage, thus clarifying a number of apparently contradictory empirical results. Chapter 4 presents a model where fire-sales and bank runs are self-fulfilling and mutually reinforcing. With endogenous fire sale prices, the model delivers two new policy insights: First Bank capital can have unintended consequences on illiquidity and contagion, and therefore is not a panacea for financial stability. Second, as acknowledging a crisis aggravates financial contagion, full commitment to regulatory transparency can be suboptimal from a social welfare point-of-view. Chapter 5 is devoted to antitrust policy. It studies how cost asymmetry affects the effectiveness of corporate leniency programs. The analysis shows that using leniency programs involves a trade-off between ex-ante deterrence and ex-post efficiency. For traditional antitrust investigation can both deter cartels and improve allocation, leniency programs should be viewed as a second best solution for budget-constrained antitrust authorities.

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Ma K. Essays on financial fragility and regulation. Tilburg: CentER, Center for Economic Research, 2013. 216 p. (CentER Dissertation Series).