Bank Capital Regulation and Incentives for Risk-Taking
نویسندگان
چکیده
We analyse the incentive impact of bank capital regulation in a model with endogenous capital, assuming regulators randomly audit banks and require undercapitalised banks either to bear the fixed cost of new issue or to liquidate. Forward looking banks with sufficient franchise value maintain a buffer of capital in excess of the regulatory minimum. In our dynamic setting we show, amongst other results: that incentives for risk taking depend upon this buffer of free capital, not the total level; and that the regulatory capital requirement has no long run effect on bank risk-taking. [94 words] Journal of Economic Literature number: G21
منابع مشابه
The Relationship between Bank Capital, Risk-Taking, and Capital Regulation: A Review of the Literature
Bank capital regulation seems to be today’s most accepted regulatory instrument. The reasoning is that limited liability and deposit insurance appear to give banks incentives for excessive risktaking. Capital requirements can alleviate this problem as banks are obliged to hold more capital which forces them to have more of their own funds at risk. But the theoretical literature has much more to...
متن کاملThe Effect Of Capital Buffer On The Relationship Between Liquidity Risk And Market and Book Risk Taking Of The Banks
This research examines the effect of the Capital Buffer, on banks as a regulatory and controlling factor on the relationship between liquidity risk and banks' risk aversion. In this study, eight banks were surveyed for the period of 2011-2014. In order to measure the Capital Buffer criterion, the legal deposit rates of central bank of the Islamic Republic of Iran has been used. For measuring...
متن کاملState-Contingent Bank Regulation With Unobserved Action and Unobserved Characteristics
This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks’ risk choice, even though all agents are risk neutral and there are no deadweight costs of bank failure, because high risk adversely affects...
متن کاملAccounting for Banks, Capital Regulation and Risk-Taking
This paper examines risk-taking incentives in banks under different accounting regimes with capital regulation. In the model the bank’s decisions of capital issuance and investment policy are jointly determined. Given exogenous minimum capital requirement, the bank is more likely to issue equity capital in excess of the minimum required level and implement less risky investment policy under eit...
متن کاملThe system-wide effects of bank capital regulation on credit supply and risk-taking∗
We propose a tractable framework to examine the system-wide effects of bank capital requirements. In our model, banks can serve a socially beneficial role by financing firms that are credit rationed by public markets, but banks’ access to deposit insurance (or implicit guarantees) creates socially undesirable risk-shifting incentives. Equity ratio requirements reduce banks’ risk-taking incentiv...
متن کامل