We present a screening model of the risk sensitivity bank capital regulation. A banker funds project with uninsured deposits and costly capital. Capital resolves moral hazard problem in choice probability default (PD). The project’s loss given (LGD) is banker’s private information. regulator receives noisy signal about LGD imposes minimum requirement. show that optimal regulation non-monotonic ...

This paper develops a structural, dynamic model of a banking firm to analyse how banks adjust their loan portfolios over time. In the model, banks experience capital shocks, face uncertain future loan demand, and incur costs based on their proximity to regulatory minimum capital requirements. Non-linear relationships between bank capital levels and lending are derived from the model, and key pa...