José Vicente, Central Bank of Brazil, Brazil (firstname.lastname@example.org). Aloísio Araújo, Getulio Vargas Foundation, Brazil.
Social Welfare Analysis in a Financial Economy with Risk Regulation
Article first published online: 12 MAY 2010
© 2010 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 12, Issue 3, pages 561–586, June 2010
How to Cite
VICENTE, J. and ARAÚJO, A. (2010), Social Welfare Analysis in a Financial Economy with Risk Regulation. Journal of Public Economic Theory, 12: 561–586. doi: 10.1111/j.1467-9779.2010.01464.x
We thank Humberto Moreira, Caio Ibsen Almeida, Luis Braido, João Maurício Moreira and José Carlos Fernandes for important comments. Any remaining errors are our responsibility alone. The opinions expressed herein are those of the authors and not necessarily those of the Central Bank of Brazil.
- Issue published online: 12 MAY 2010
- Article first published online: 12 MAY 2010
- Received February 1, 2008; Accepted May 25, 2009.
In the last years, regulating agencies of many countries in the world have adopted VaR-based risk regulation to control market risk of financial institutions. This paper investigates the consequences of such kind of regulation to social welfare and soundness of financial institutions through an equilibrium model. We show that the optimum level of regulation for each financial institution (the level that maximizes its utility) depends on its appetite for risk and that some of them can perform better in a regulated economy. In addition, another important result asserts that under certain market conditions the financial fragility of an institution can be greater in a regulated economy than in an unregulated one.