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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

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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Bibliographic 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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  1. Gary Gorton & Andrew Winton, 1995. "Bank Capital Regulation in General Equilibrium," NBER Working Papers 5244, National Bureau of Economic Research, Inc.
  2. Alexander F. Tieman & Wilko Bolt, 2004. "Banking Competition, Risk, and Regulation," IMF Working Papers 04/11, International Monetary Fund.
  3. Peter J.G. Vlaar, 2000. "Capital requirements and competition in banking industry," Working Paper Series WP-00-18, Federal Reserve Bank of Chicago.
  4. Matutes, Carmen & Vives, Xavier, 1995. "Imperfect Competition, Risk Taking, and Regulation in Banking," CEPR Discussion Papers 1177, C.E.P.R. Discussion Papers.
  5. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  6. P.J.G. Vlaar, 2000. "Capital requirements and competition in the banking industry," WO Research Memoranda (discontinued) 634, Netherlands Central Bank, Research Department.
  7. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
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