How to design bank capital requirements when banks can misreport the value of their assets? We show that the answer depends critically on the existence of secondary markets for bank assets. Without secondary markets, capital requirements based on banks’reporting are more socially desirable than a fixed capital requirement if savings on costly bank capital are suffi ciently high. Yet with second...

This paper studies the consequences of a regulatory pay cap in proportion to assets on bank risk, bank value, and bank asset allocations. The cap is shown to lower banks’ risk and raise banks’ values by acting against a competitive externality in the labour market. The risk reduction is achieved without the possibility of reduced lending from a Tier 1 increase. The cap encourages diversificatio...

The aims of accounting standard setting is substantially different to those of bank regulation. Financial reporting follows as a general purpose to provide information to those outside the firm to support decision usefulness. In contrast to this prudential bank regulation seeks to decrease the frequency and cost of bank failures and to protect the financial system as a whole by limiting the fre...

Bank leverage constraints can emerge from regulatory capital requirements as well central bank collateral in reserve lending facilities. While these two channels are usually examined separately, we able to compare them with the help of a money creation model which reserves have be acquired settle interbank liabilities. In particular, show that regard monitoring, monetary policy via leads unique...

We construct a model in which bank capital regulation and financial innovation interact. Innovation takes the form of pooling and tranching of assets and the creation of separate structures with different seniority, different risk, and different capital charges, a process that captures some stylized features of structured finance. Regulation is motivated by the divergence of private and social ...