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Journal Articles International Journal of Central Banking Year : 2015

Risk Shifting with Fuzzy Capital Constraints

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Abstract

We construct a model where risk shifting can be moder-ated by capital requirements. Imperfect information about the level of capital per unit of risk, however, introduces uncertaintyabout the risk exposure of intermediaries. Over-estimation ofthe capital held by financial intermediaries, or the extent ofregulatory arbitrage, may induce households to wrongly infer from higher asset prices that the fundamentals of risky assets have improved. This mechanism can notably explain the lowrisk premia paid by U.S. financial intermediaries between 2000 and 2007 in spite of their increased exposure to risk through higher leverage. Moreover, the lower the level of the risk-free interest rate, the more risk is under-estimated
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Dates and versions

hal-03473718 , version 1 (10-12-2021)

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Simon Dubecq, Benoit Mojon, Xavier Ragot. Risk Shifting with Fuzzy Capital Constraints. International Journal of Central Banking, 2015, 11 (1), pp.71 - 101. ⟨hal-03473718⟩
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