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Risk Shifting with Fuzzy Capital Constraints

Author

Listed:
  • Simon Dubecq

    (European Central Bank - European Central Bank)

  • Benoît Mojon

    (Banque de france - Banque de France)

  • Xavier Ragot

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

We construct a model where risk shifting can be moderated by capital requirements. Imperfect information about the level of capital per unit of risk, however, introduces uncertainty about the risk exposure of intermediaries. Over-estimation of the capital held by financial intermediaries, or the extent of regulatory arbitrage, may induce households to wrongly infer from higher asset prices that the fundamentals of risky assets have improved. This mechanism can notably explain the low risk premia paid by U.S. financial intermediaries between 2000 and 2007 in spite of their increased exposure to risk through higher leverage. Moreover, the lower the level of the risk-free interest rate, the more risk is under-estimated.

Suggested Citation

  • Simon Dubecq & Benoît Mojon & Xavier Ragot, 2015. "Risk Shifting with Fuzzy Capital Constraints," Post-Print halshs-01157527, HAL.
    • Handle: RePEc:hal:journl:halshs-01157527
    DOI: 10.2139/ssrn.2008132
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01157527
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    References listed on IDEAS

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    Cited by:

    1. Franklin Allen & Gadi Barlevy & Douglas Gale, 2022. "Asset Price Booms and Macroeconomic Policy: A Risk-Shifting Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(2), pages 243-280, April.
    2. Filardo, Andrew & Hubert, Paul & Rungcharoenkitkul, Phurichai, 2022. "Monetary policy reaction function and the financial cycle," Journal of Banking & Finance, Elsevier, vol. 142(C).
    3. Simona E. Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2019. "Managing Risk Taking With Interest Rate Policy And Macroprudential Regulations," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1056-1081, April.
    4. Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul, 2019. "The reaction function channel of monetary policy and the financial cycle," SciencePo Working papers Main hal-03403260, HAL.
    5. Liu, Amanda & Shim, Ilhyock, 2024. "Shadow loans and regulatory arbitrage: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 160(C).
    6. Cociuba, Simona E. & Shukayev, Malik & Ueberfeldt, Alexander, 2016. "Collateralized borrowing and risk taking at low interest rates," European Economic Review, Elsevier, vol. 85(C), pages 62-83.
    7. repec:spo:wpmain:info:hdl:2441/mqe122bu9lprrh0g2eloopgd is not listed on IDEAS
    8. repec:hal:spmain:info:hdl:2441/3pv2em81ob86bp54ak8dq2e0a1 is not listed on IDEAS
    9. repec:hal:spmain:info:hdl:2441/4di9av1cud81urnl29tar56o5s is not listed on IDEAS
    10. Barthélemy, Jean & Cléaud, Guillaume, 2018. "Trade Balance And Inflation Fluctuations In The Euro Area," Macroeconomic Dynamics, Cambridge University Press, vol. 22(4), pages 931-960, June.
    11. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    12. repec:spo:wpmain:info:hdl:2441/3pv2em81ob86bp54ak8dq2e0a1 is not listed on IDEAS
    13. repec:spo:wpmain:info:hdl:2441/4di9av1cud81urnl29tar56o5s is not listed on IDEAS
    14. repec:hal:spmain:info:hdl:2441/mqe122bu9lprrh0g2eloopgd is not listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Capital;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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