Robust capital regulation
AbstractRegulators and markets can find the balance sheets of large financial institutions difficult to penetrate, and they are mindful of how undercapitalization can create incentives to take on excessive risk. This study proposes a novel framework for capital regulation that addresses banks' incentives to take on excessive risk and leverage. The framework consists of a special capital account in addition to a core capital requirement. The special account would accrue to a bank's shareholders as long as the bank is solvent, but would pass to the bank's regulators—rather than its creditors—if the bank fails. By design, this special account thus limits risk taking, but ensures that creditors' disciplining incentives are preserved.
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Bibliographic InfoArticle provided by Federal Reserve Bank of New York in its journal Current Issues in Economics and Finance.
Volume (Year): 18 (2012)
Issue (Month): May ()
Other versions of this item:
- Acharya, Viral V & Mehran, Hamid & Schuermann, Til & Thakor, Anjan, 2012. "Robust Capital Regulation," CEPR Discussion Papers 8792, C.E.P.R. Discussion Papers.
- Viral Acharya & Hamid Mehran & Til Schuermann & Anjan Thakor, 2011. "Robust capital regulation," Staff Reports 490, Federal Reserve Bank of New York.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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