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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Regulating Financial Networks Under Uncertainty
Carlos Ramirez
Abstract

I study the problem of regulating a network of interdependent financial institutions that is prone to contagion when there is uncertainty regarding its precise structure. I show that such uncertainty reduces the scope for welfare-improving interventions. While improving network transparency potentially reduces this uncertainty, it does not always lead to welfare improvements. Under certain conditions, regulation that reduces the risk-taking incentives of a small set of institutions can improve welfare. The size and composition of such a set crucially depend on the interplay between (i) the (expected) susceptibility of the network to contagion, (ii) the cost of improving network transparency, (iii) the cost of regulating institutions, and (iv) investors' preferences.


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Carlos Ramirez, Regulating Financial Networks Under Uncertainty, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2019-056, Aug 2019.
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Subject headings:
Keywords: Financial networks ; Contagion ; Policy design under uncertainty
DOI: 10.17016/FEDS.2019.056
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