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Regulation of Large Financial Institutions: Lessons from Corporate Finance Theory

Author

Listed:
  • John P. Harding

    (University of Connecticut)

  • Stephen L. Ross

    (University of Connecticut)

Abstract

Equity capital is the shock absorber for our financial system and the current financial crisis, like a bumpy road for an auto designer, provides a unique opportunity for financial regulators to evaluate the predictions of theory and improve the design of the regulatory system. The purpose of this paper is to apply a simple model of firm capital structure to the current situation and summarize the insights it provides regarding the regulation of large financial institutions in a post-crisis world. The paper begins with a brief summary of the model and uses the results of that model to place the evolution of the current crisis into perspective. The paper concludes with forward-looking observations and suggestions for future regulation.

Suggested Citation

  • John P. Harding & Stephen L. Ross, 2009. "Regulation of Large Financial Institutions: Lessons from Corporate Finance Theory," Working papers 2009-29, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2009-29
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    File URL: https://media.economics.uconn.edu/working/2009-29.pdf
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    Citations

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    Cited by:

    1. Heller, Yuval & Peleg Lazar, Sharon & Raviv, Alon, 2022. "Banks’ risk taking and creditors’ bargaining power," Journal of Corporate Finance, Elsevier, vol. 74(C).
    2. Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2018. "What Drives Racial and Ethnic Differences in High-Cost Mortgages? The Role of High-Risk Lenders," The Review of Financial Studies, Society for Financial Studies, vol. 31(1), pages 175-205.
    3. John Harding & Xiaozhong Liang & Stephen Ross, 2013. "Bank Capital Requirements, Capital Structure and Regulation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 43(2), pages 127-148, April.

    More about this item

    Keywords

    Financial Institutions; Financial Crisis; Capital Regulation; Regulatory Reform; Firm Capital Structure;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G2 - Financial Economics - - Financial Institutions and Services
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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