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Diversification, protection of liability holders and regulatory arbitrage


Koch-Medina, Pablo; Munari, Cosimo; Sikic, Mario (2015). Diversification, protection of liability holders and regulatory arbitrage. ArXiv.org 1502.03252, Cornell University.

Abstract

Any solvency regime for financial institutions should be aligned with the two fundamental objectives of regulation: protecting liability holders and securing the stability of the financial system. From these objectives wederive two normative requirements for capital adequacy tests, called surplus and numeraire invariance, respectively. We characterize capital adequacy tests that satisfy surplus and numeraire invariance, establish anintimate link between these requirements, and highlight aninherent tension between the ability to meet them and the desire to give credit for diversification.

Abstract

Any solvency regime for financial institutions should be aligned with the two fundamental objectives of regulation: protecting liability holders and securing the stability of the financial system. From these objectives wederive two normative requirements for capital adequacy tests, called surplus and numeraire invariance, respectively. We characterize capital adequacy tests that satisfy surplus and numeraire invariance, establish anintimate link between these requirements, and highlight aninherent tension between the ability to meet them and the desire to give credit for diversification.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:29 June 2015
Deposited On:01 Mar 2016 07:58
Last Modified:27 May 2024 15:24
Series Name:ArXiv.org
Number of Pages:18
ISSN:2331-8422
OA Status:Green
Free access at:Related URL. An embargo period may apply.
Related URLs:https://www.researchgate.net/publication/272194541_Diversification_protection_of_liability_holders_and_regulatory_arbitrage (Author)
https://www.zora.uzh.ch/id/eprint/149124/
Other Identification Number:merlin-id:12494
  • Content: Published Version