Social Welfare Analysis in a Financial Economy with Risk Regulation

Journal of Public Economic Theory Volume 12, Issue 3, pages 561–586, June 2010

26 Pages Posted: 29 Sep 2013

See all articles by Jose Vicente

Jose Vicente

Government of the Federative Republic of Brazil - Central Bank of Brazil; Ibmec, Rio de Janeiro - IBMEC Business School

Aloisio Araujo

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Date Written: May 12, 2010

Abstract

In the last years, regulating agencies of many countries in the world have adopted VaR-based risk regulation to control market risk of financial institutions. This paper investigates the consequences of such kind of regulation to social welfare and soundness of financial institutions through an equilibrium model. We show that the optimum level of regulation for each financial institution (the level that maximizes its utility) depends on its appetite for risk and that some of them can perform better in a regulated economy. In addition, another important result asserts that under certain market conditions the financial fragility of an institution can be greater in a regulated economy than in an unregulated one.

Suggested Citation

Vicente, Jose and Araujo, Aloisio, Social Welfare Analysis in a Financial Economy with Risk Regulation (May 12, 2010). Journal of Public Economic Theory Volume 12, Issue 3, pages 561–586, June 2010, Available at SSRN: https://ssrn.com/abstract=2330468

Jose Vicente

Government of the Federative Republic of Brazil - Central Bank of Brazil

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Ibmec, Rio de Janeiro - IBMEC Business School

SCN Quadra 2, Bloco A, 2nd. floor
Ed. Corporate Financial Center
Brasília, 707712-900
Brazil

Aloisio Araujo (Contact Author)

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
16
Abstract Views
275
PlumX Metrics