The Impact of Capital-Based Regulation on Bank Risk-Taking
In this paper we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984–1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model implies a U-shaped relationship betwee...
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| Published in: | Journal of financial intermediation Vol. 8; no. 4; pp. 317 - 352 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
| Published: |
Elsevier Inc
01-10-1999
Elsevier |
| Series: | Journal of Financial Intermediation |
| Online Access: | Get full text |
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| Summary: | In this paper we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984–1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model implies a U-shaped relationship between capital and risk-taking: As a bank's capital increases it first takes less risk, then more risk. A deposit insurance premium surcharge on undercapitalized banks induces them to take more risk. An increased capital requirement, whether flat or risk-based, tends to induce more risk-taking by ex-ante well-capitalized banks that comply with the new standard. Journal of Economic Literature Classification Numbers: G20, G28. |
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| ISSN: | 1042-9573 1096-0473 |
| DOI: | 10.1006/jfin.1999.0276 |