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Optimal Regulation of Systemic Risk by Tax

  • Author / Creator
    Wai, Kevin
  • Financial systemic crisis could be broadly understood as the deterioration of the banking sector which results in damage to the real economy. From elementary accounting, a firm's financial position can be characterized by the value of its asset holdings versus the amount it borrow from others. If assets are not worth sufficiently more than the firm owes, it will be in distress, and will not be able to operate its business efficiently. In the case of a bank, this means the difference between the dollar amount it lends and the amount it receives from depositors is not sufficiently high or even worse, is negative. If either case happens to the aggregate banking sector, a systemic crisis will ensue, and there will be significant costs incurred by society. This M.Sc. thesis will concentrate on an existing economic model which incorporates the risk of systemic crisis, as defined above, at a future time. In the context of this model, a tax as a function of the banks' dollar value of investments, raised debt, and equity funding at present time will incentivize them to choose these quantities in the interest of social welfare. The thesis will provide mathematical explanations for this effect. Moreover, MATLAB codes are included to calculate the tax amounts charged to each bank when they behave in a socially optimal manner.

  • Subjects / Keywords
  • Graduation date
    2014-11
  • Type of Item
    Thesis
  • Degree
    Master of Science
  • DOI
    https://doi.org/10.7939/R39W0956G
  • License
    This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.
  • Language
    English
  • Institution
    University of Alberta
  • Degree level
    Master's
  • Department
    • Department of Mathematical and Statistical Sciences
  • Specialization
    • Mathematical Finance
  • Supervisor / co-supervisor and their department(s)
    • Cadenillas, Abel (Mathematical and Statistical Sciences)
  • Examining committee members and their departments
    • Cadenillas, Abel (Mathematical and Statistical Sciences)
    • Frei, Christoph (Mathematical and Statistical Sciences)
    • Putkaradze, Vakhtang (Mathematical and Statistical Sciences)
    • Aguerrevere, Felipe (Finance and Statistical Analysis)