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Cambridge Finance Workshop - Marcella Lucchetta

Cambridge Finance Workshop Series are usually held on Thursdays during term time. The workshops are an opportunity for those working in finance to present their latest results or papers.
When Oct 11, 2018
from 01:00 PM to 02:00 PM
Where Room W4.05, Cambridge Judge Business School
Contact Name
Contact Phone 01223768129
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Marcella Lucchetta

(Università Ca’Foscari Venezia)

Title : Dynamic Bank Capital Regulation in Equilibrium, with Andrea Gamba and Duglas Gale

Abstract
We study optimal bank regulation in an economy with aggregate uncertainty. Bank liabilities are used as “money” and hence earn lower returns than equity. In laissez faire equilibrium, banks maximize market value, trading off the funding advantage of debt against the risk of costly default. The capital structure is not socially optimal because external costs of distress are not internalized by the banks. The constrained efficient allocation is characterized as the solution to a planner’s problem. Efficient regulation is procyclical, but countercyclical relative to laissez faire. We show that simple leverage constraints can get the decentralized economy close to the constrained efficient outcome.

 

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