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The Risks of Financial Institutions$
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Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

Systemic Risk and Regulation

Systemic Risk and Regulation

(p.341) 7 Systemic Risk and Regulation
The Risks of Financial Institutions

Franklin Allen

Douglas Gale

University of Chicago Press

This chapter explains that inefficient regulation can result in risk-transfer activity that is focused on evasion of regulation, and that such activity can increase systemic risk. It also provides evidence and models demonstrating that the details of how securitizations are structured and used are significant to their net effect on bank insolvency risk and systemic risk. It shows that capital regulation can increase systemic risk when markets and contracts are incomplete. The capital enhances risk sharing and allows more funds to be invested in loans, both from the extra capital and from the lower-return long asset. Inefficient banking regulation and credit risk transfer can increase overall systemic risk. In the model presented, systemic risk was not particularly damaging. Assets could be liquidated in the banking system for the full amount of their value.

Keywords:   capital regulation, systemic risk, securitizations, markets, banking regulation, credit risk transfer, banking system

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