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When Basle II doesn't work: Contingency Rules versus Fixed Requirements

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Author Info
W. Bolt
A.F. Tieman

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Abstract

Under 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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File URL: http://www.dnb.nl/binaries/wo0681_tcm46-145978.pdf
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Publisher Info
Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 681.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:681

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Web page: http://www.dnb.nl/en/
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Related research
Keywords: capital adequacy requirements; contingency rules; Basle II;

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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

References listed on IDEAS
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  1. P.J.G. Vlaar, 2000. "Capital requirements and competition in the banking industry," WO Research Memoranda (discontinued) 634, Netherlands Central Bank, Research Department. [Downloadable!]
  2. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January. [Downloadable!] (restricted)
    Other versions:
  3. W. Bolt & A. F. Tieman, 2001. "Banking competition, risk, and regulation," WO Research Memoranda (discontinued) 647, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  4. Peter J.G. Vlaar, 2000. "Capital requirements and competition in banking industry," Working Paper Series WP-00-18, Federal Reserve Bank of Chicago. [Downloadable!]
  5. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 745-70, November.
    Other versions:
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This page was last updated on 2009-11-11.

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