Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/111738 
Year of Publication: 
2015
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 15-057/IV/DSF93
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A small stylised model illustrates the trade-off between static and time varying limits on leverage in dampening the financial cycle. The policy section proposes its application to highly leveraged entities and activities across the financial system. Whereas the traditional view on regulation focuses on capital as a buffer against exogenous risks, our approach focuses instead on debt financing, endogenous feedback mechanisms and resource allocation. It explicitly addresses the boundary problem in entity-based financial regulation and provides a motivation for substantially lower levels of leverage – and thereby higher capital buffers – than in the traditional approach.
Subjects: 
Financial cycle
macroprudential regulation
financial supervision
(shadow) banking
JEL: 
E58
G10
G18
G20
Document Type: 
Working Paper

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