When Basle II doesn't work: Contingency Rules versus Fixed Requirements
AbstractUnder the new Basle Capital Accords, regulation takes the form of a contingency rule prescribing a certain level of bank capital contingent on the bank's risk taking behaviour in choosing its asset portfolio. In a simple dynamic model of banking with binding regulation we show that such Basle II regulation is Pareto inferior to regulation by a fixed capital requirement if and only if some condition on elasticities is satisfied. We provide a simple example to illustrate our findings.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 681.
Date of creation: 2001
Date of revision:
capital adequacy requirements; contingency rules; Basle II;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
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