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The recent financial crisis has forced a rethink of banking regulation and supervision and the role of financial innovation. This paper develops a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium, but deposit insurance will tend to increase the level of capital required. If supervision detects risky behavior ex ante then it is complementary to capital regulation. However, financial innovation may erode supervisors’ ability to detect risk and capital levels should then be higher. Regulators, however, may not be aware their capacities have been undermined. The paper argues for a four-prong policy response with higher bank capital ratios, enhanced supervision, limits to the use of complex financial instruments and Coco’s. The results may support the institutional arrangements proposed recently in the United Kingdom.
What happens to firms in the face of financial crises? Little research has been done on the microeconomic implications of financial policies and crises while attention has been focused on the macroeconomic effects of these events. This book attempts to fill this research gap. Credit Constraints and Investment in Latin America contains new evidence on the nature, extent, evolution and consequences ... (View publication)
This paper applies an analytical framework that identifies the types of market failures responsible for the underdevelopment of the housing finance system. The working hypothesis is that there is a correlation between the nature and scope of market failures, and the kind of public interventions actually implemented. Evidence seems to disprove the policy adequacy hypothesis. Nevertheless, it is enc ... (View publication)
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