Information advantages, excessive risk-taking, and capital regulation for BigTechs in financial intermediation

Abstract

This paper establishes theoretical models to study capital regulation of BigTech firms (BigTechs hereafter) providing financial intermediation services. In our models, BigTechs borrow debts to invest between socially efficient prudent assets and socially inefficient risky assets. Limited liabilities imply that with a higher capital adequacy ratio, BigTechs are more risk averse and favor the prudent asset more. Then we examine how better information of BigTechs will affect BigTechs' incentive for excessive risk-taking, welfare, and capital regulation. The major results produced by our models are as follows: (1) Better information of BigTechs does not eliminate and could in some circumstances exacerbate their excessive risk-taking behavior. (2) Better information of BigTechs does not necessarily improve welfare. BigTechs could employ better information to more precisely identify the socially inefficient risky asset to invest in, causing more severe resource misallocation. (3) Capital regulation is an effective tool to curb BigTechs' excessive risk-taking and to ensure that better information of BigTechs will improve welfare.