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Regulatory taxes, investment, and financing decision for insured banks

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Author Info

  • Anlong Li
  • Peter Ritchken
  • L. Sankarasubramanian
  • James B. Thomson

Abstract

An investigation of the effects of interest rate and credit risk on optimal capital structure and investment decisions. The authors show that with no uncertainty in interest rates, capital regulation will reduce the risk of the bank's assets, but that under interest rate uncertainty, the impact of regulation may be detrimental and raise the risk of the deposits as well as government subsidies to the bank's shareholders.

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File URL: http://www.clevelandfed.org/Research/Workpaper/1993/wp9303.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9303.

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Date of creation: 1993
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Handle: RePEc:fip:fedcwp:9303

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Keywords: Bank capital ; Deposit insurance;

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References

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  1. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  2. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
  3. Herring, Richard J & Vankudre, Prashant, 1987. " Growth Opportunities and Risk-Taking by Financial Intermediaries," Journal of Finance, American Finance Association, vol. 42(3), pages 583-99, July.
  4. Crouhy, Michel & Galai, Dan, 1991. "A contingent claim analysis of a regulated depository institution," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 73-90, February.
  5. Edward J. Kane & Haluk Unal, 1990. "Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms," NBER Working Papers 2693, National Bureau of Economic Research, Inc.
  6. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-33, December.
  7. Gennotte, Gerard & Pyle, David, 1991. "Capital controls and bank risk," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 805-824, September.
  8. Peter Ritchken & James Thomson & Ray DeGennaro & Anlong Li, 1991. "On flexibility, capital structure, and investment decisions for the insured bank," Working Paper 9110, Federal Reserve Bank of Cleveland.
  9. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  10. J. Huston McCulloch, 1978. "Interest Rate Risk and Capital Adequacy For Traditional Banks and Financial Intermediaries," NBER Working Papers 0237, National Bureau of Economic Research, Inc.
  11. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
  12. 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.
  13. Mark D. Flood, 1990. "On the use of option pricing models to analyze deposit insurance," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 19-35.
  14. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-65, March.
  15. Kane, Edward J & Unal, Haluk, 1990. " Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms," Journal of Finance, American Finance Association, vol. 45(1), pages 113-36, March.
  16. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
  17. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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Citations

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Cited by:
  1. Anthony Saunders & Berry Wilson, 2001. "An Analysis of Bank Charter Value and Its Risk-Constraining Incentives," Journal of Financial Services Research, Springer, vol. 19(2), pages 185-195, April.
  2. Peter Ritchken & James Thomson & Ivilina Popova, 1995. "The changing role of banks and the changing value of deposit guarantees," Working Paper 9502, Federal Reserve Bank of Cleveland.

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