Model Proposal: Default and Financial Regulation

Osorio, Carolina, Kashyap, Anil, Tsomocos, Dimitrios and Goodhart, Charles (2010) Model Proposal: Default and Financial Regulation. Saïd Business School, University of Oxford.

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Abstract

This paper assesses the choice of different regulatory policy instruments for crisis management and
prevention. We show that Capital and Liquidity Requirements (as Basel III proposes) are not
suffcient to ensure Financial Stability. Three different tools are required to address three different
inefficiencies. Capital requirements mitigate `structural' default frictions; liquidity requirements
contain the contagious effects of small shocks by stemming the collapse of collateral and asset prices;
and margin requirements protect against excessive leverage and securitization.

Item Type: Other Working Paper
Keywords: general equilibrium, securitization, financial fragility, monetary policy, regulation
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 16 Dec 2010 09:34
Last Modified: 23 Oct 2015 14:05
URI: http://eureka.sbs.ox.ac.uk/id/eprint/559

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