Hormoz Ramian

My research studies how joint macroprudential policies provide welfare gains to society. Understanding the interdependencies among regulatory policies remains an open area of research with welfare implications. Conflicting effects among policies may lead to over-regulation and disruptions in the credit flow to the real economy. Alternatively, policies decided in isolation may lead to under-regulation, heightened default risk with possibly failures with socially undesirable outcomes. My research agenda is focused on providing a framework to understand policy interdependencies and show how a comprehensive financial regulation collectively advances the efficiency of the financial system.

I show that when the banking sector’s assets comprise large excess reserves and loans, jointly determined capital regulation and interest-on-excess-reserves (IOER) policies provide welfare gains. In general equilibrium, falling IOER is associated with a proportional fall in deposit rate only when IOER is above the zero bound. This leads to a faster fall in the bank’s interest expenses than its interest incomes. Given any lending level, lower net interest expenses enhance bank solvency. Nonetheless, the risk-weighted capital regulation remains unchanged and hence becomes socially costly. I show that jointly determined policies achieve welfare gains by loosening the capital requirement and lowering IOER to expand the credit flow, while bank failure likelihood remains constant. Conversely, lowering IOER below the zero bound is associated with a nonresponsive deposit rate that leads to growing net interest expenses and worsening bank solvency. In that case, I show that a stricter capital constraint together with a lower IOER provide social value.

Financial regulation provides welfare gains to the society, at the expense of an exacerbated wealth distribution. I show that when capital markets are segmented, financial regulation leads to a transfer of wealth from depositors to equity investors. An integrated monetary and financial regulatory policies achieve welfare gains due to a credit flow expansion to the real sector, while default likelihood within the banking sector remains fixed. Nonetheless, this constrained equilibrium allocation is associated with a lower deposit rate while dividends increase, leading to a wealth transfer across market segments. I provide sufficient conditions under which optimal financial regulation leads to welfare gains without exacerbating wealth heterogeneity.