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Crises and Capital Requirements in Banking

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Author Info
Alan D. Morrison
Lucy White
Abstract

We analyze a general equilibrium model in which there is both adverse selection of, and moral hazard by, banks. The regulator can screen banks prior to giving them a licence, audit them ex post to learn the success probability of their projects, and impose capital adequacy requirements. Capital requirements combat moral hazard when the regulator has a strong screening reputation, and they otherwise substitute for screening ability. Crises of confidence can occur only in the latter case, and contrary to conventional wisdom, the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks.

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File URL: http://hdl.handle.net/10.1257/000282805775014254
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=5&article=10&issue_date=December2005
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 5 (December)
Pages: 1548-1572
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Handle: RePEc:aea:aecrev:v:95:y:2005:i:5:p:1548-1572

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Morrison, Alan & White, Lucy, 2005. "Level Playing Fields in International Financial Regulation," CEPR Discussion Papers 5247, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Dewatripont, Mathias & Tirole, Jean, 1992. "Efficient Governance Structure : Implications for Banking Regulation," IDEI Working Papers 18, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April. [Downloadable!] (restricted)
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  4. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06. [Downloadable!] (restricted)
  5. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December. [Downloadable!] (restricted)
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  6. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June. [Downloadable!] (restricted)
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  7. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Edward J. Kane, 1989. "How Incentive-Incompatible Deposit-Insurance Funds Fail," NBER Working Papers 2836, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Bhattacharya, Sudipto, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-84, May. [Downloadable!] (restricted)
  10. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  11. Barth, James R. & Caprio Jr, Gerard & Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank. [Downloadable!]
  12. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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  13. Thomas F. Hellmann & Kevin C. Murdock & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March. [Downloadable!] (restricted)
  14. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June. [Downloadable!] (restricted)
  15. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," Center for Financial Institutions Working Papers 02-28, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2006. "Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities," Cahiers de recherche 06-06, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
    Other versions:
  2. Amadou N. R. Sy & Jorge A. Chan-Lau, 2006. "Distance-to-Default in Banking: A Bridge Too Far?," IMF Working Papers 06/215, International Monetary Fund. [Downloadable!]
  3. Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  4. Boot, Arnoud W A & Marinc, Matej, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," CEPR Discussion Papers 5518, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Luc Laeven & Ross Levine, 2008. "Bank Governance, Regulation, and Risk Taking," NBER Working Papers 14113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Franklin Allen & Elena Carletti & Robert Marquez, 2009. "Credit Market Competition and Capital Regulation," Economics Working Papers ECO2009/08, European University Institute. [Downloadable!]
    Other versions:
  7. TCHANA TCHANA , Fulbert, 2008. "The Empirics of Banking Regulation," MPRA Paper 9299, University Library of Munich, Germany. [Downloadable!]
  8. Farhi, Emmanuel & Lerner, Josh & Tirole, Jean, 2008. "Fear of Rejection? Tiered Certification and Transparency," IDEI Working Papers 534, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  9. Hege, Ulrich & Feess, Eberhard, 2007. "Basel II and the Value of Bank Differentiation," Les Cahiers de Recherche 879, HEC Paris. [Downloadable!]
  10. E. Agliardi, 2007. "Bank Closure Policies and Capital Requirements: a Note," Working Papers 603, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
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