Abstract
We modify the Diamond and Dybvig (1983) model of banking to jointly study various regulations in the presence of credit and run risk. Banks choose between liquid and illiquid assets on the asset side, and between deposits and equity on the liability side. The endogenously determined asset portfolio and capital structure interact to support credit extension, as well as to provide liquidity and risk-sharing services to the real economy. Our modifications create wedges in the asset and liability mix between the private equilibrium and a social planner’s equilibrium. Correcting these distortions requires the joint implementation of a capital and a liquidity regulation.
- Kashyap, Anil K. and Tsomocos, Dimitrios P. and Vardoulakis, Alexandros, Optimal Bank Regulation in the Presence of Credit and Run Risk (September 2017). Saïd Business School WP 2017-17. Available at SSRN: https://ssrn.com/abstract=3048376
Dr Dimitrios Tsomocos
A mathematical economist by trade, Dr Tsomocos’s main areas of expertise include banking and regulation, incomplete asset markets, systemic risk, financial instability, and issues of new financial architecture.
His research has had a substantial impact on economic policy around the world. In particular, he analyses issues of contagion, financial fragility, interbank linkages and the impact of the Basel Accord and financial regulation in the macroeconomy, using a General Equilibrium model with incomplete asset markets, money and endogenous default. He is working towards designing a new paradigm of monetary policy, financial stability analysis and macroprudential regulation.
He is an economic advisor to one of the main political parties in Greece, and has worked with central banks in countries such as England, Bulgaria, Colombia, Greece, Korea and Norway. He co-developed the Goodhart–Tsomocos model of financial fragility in 2003 while working as an economist at the Bank of England. More than ten central banks have calibrated the model, including the Bank of Bulgaria, the Bank of Colombia, the Bank of England and the Bank of Korea.
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Maestría en Ciencias en Finanzas