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Capital Adequacy Rules: Implications for Banks' Risk-Taking

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Author Info
Thomas Gehrig

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Abstract

It is argued that the liberalization of financial markets and the increasing mobility of customers have rendered national banking regulation increasingly ineffective and led to a process of deregulation. Capital adequacy rules are the central instrument for a starting process of reregulation and international harmonization of the regulation of banks. Their advantage consists in their simplicity. Their allocative consequences are less clear. For example, it is argued that the structure of the competitive environment is important in assessing the likely consequences of capital regulation. In perfectly competitive markets capital requirements tend to reduce management discretion and, therefore, reduce risk-taking. In imperfectly competitive markets capital requirements tend to reduce the intensity of competition. Nevertheless their overall consequences are ambiguous.

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Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 131 (1995)
Issue (Month): IV (December)
Pages: 747-764
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Handle: RePEc:ses:arsjes:1995-iv-12

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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. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 213-32. [Downloadable!] (restricted)
  2. Cerasi, Vittoria & Daltung, Sonja, 2000. "The optimal size of a bank: Costs and benefits of diversification," European Economic Review, Elsevier, vol. 44(9), pages 1701-1726, October. [Downloadable!] (restricted)
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  3. Englund, Peter, 1990. "Financial deregulation in Sweden," European Economic Review, Elsevier, vol. 34(2-3), pages 385-393, May. [Downloadable!] (restricted)
  4. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, vol. 42(2), pages 277-310, February. [Downloadable!] (restricted)
  5. Martin Hellwig, 1995. "Systemic Aspects of Risk Management in Banking and Finance," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 723-737, December. [Downloadable!]
  6. Kahane, Yehuda, 1977. "Capital adequacy and the regulation of financial intermediaries," Journal of Banking & Finance, Elsevier, vol. 1(2), pages 207-218, October. [Downloadable!] (restricted)
  7. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December. [Downloadable!] (restricted)
  8. Brimmer, Andrew F, 1989. "Distinguished Lecture on Economics in Government: Central Banking and Systemic Risks in Capital Markets," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 3-16, Spring. [Downloadable!] (restricted)
  9. 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)
  10. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April. [Downloadable!] (restricted)
  11. Mishkin, Frederic S, 1992. "An Evaluation of the Treasury Plan for Banking Reform," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 133-53, Winter. [Downloadable!] (restricted)
  12. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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  1. Eva Terberger, 1995. "Comment on the Paper by Thomas Gehrig "Capital Adequacy Rules: Implications for Banks' Risk Taking"; and Summary of the Discussion," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 765-772, December. [Downloadable!]
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