Optimal Bailout Policy--An Analysis Focusing on the Regulation of Collective Banking Behavior

Zhenting Sun; Tingchun Han
August 2011
International Journal of Humanities & Social Science;Aug2011, Vol. 1 Issue 10, p96
Academic Journal
Bank regulation theory has evolved to focus on the supervision of the collective behavior of banks. Parallel investing theory, which presents parallel investing as a collective strategy of all banks, is understood as an extension of herding theory and is used to discuss optimal bailout policies. First we expand the traditional one-dimensional regulatory objective, social welfare maximization, to 3d to include efficiency and risk factors. Based on this hypothesis, we conclude that an optimal bailout policy capable of achieving the 3d objectives does not exist. We term this phenomenon objective realization--inconsistency: regulators can only balance the 3d objective and make relatively effective policies. Finally, we compare financial derivatives with bailout policy in the banking regulatory role. Under certain conditions, financial derivatives can play a very active role in banking regulation.


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