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Robust capital regulation

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Author Info

  • Viral Acharya
  • Hamid Mehran
  • Til Schuermann
  • Anjan Thakor

Abstract

Banks’ leverage choices represent a delicate balancing act. Credit discipline argues for more leverage, while balance-sheet opacity and ease of asset substitution argue for less. Meanwhile, regulatory safety nets promote ex post financial stability, but also create perverse incentives for banks to engage in correlated asset choices and to hold little equity capital. As a way to cope with these distorted incentives, we outline a two-tier capital framework for banks. The first tier is a regular core capital requirement that helps deter excessive risk-taking incentives. The second tier, a novel aspect of our framework, is a special capital account that limits risk taking but preserves creditors’ monitoring incentives.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 490.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:490

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Keywords: Bank assets ; Credit ; Bank capital ; Banks and banking - Regulations ; Systemic risk;

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References

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  1. Acharya, Viral V & Mehran, Hamid & Thakor, Anjan, 2012. "Caught between Scylla and Charybdis? Regulating bank leverage when there is rent-seeking and risk-shifting," CEPR Discussion Papers 8822, C.E.P.R. Discussion Papers.
  2. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
  3. Hamid Mehran, 0. "Bank Capital and Value in the Cross-Section," Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1019-1067.
  4. Viral V. Acharya & João A. C. Santos & Tanju Yorulmazer, 2010. "Systemic risk and deposit insurance premiums," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 89-99.
  5. Acharya, Viral V & Yorulmazer, Tanju, 2004. "Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies," CEPR Discussion Papers 4778, C.E.P.R. Discussion Papers.
  6. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  7. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports 502, Federal Reserve Bank of New York.
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Cited by:
  1. Lucyna Gornicka & Sweder van Wijnbergen, 2013. "Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital," Tinbergen Institute Discussion Papers 13-013/VI/DSF50, Tinbergen Institute.
  2. Arthur Petit-Romec, 2011. "L'intérêt d'un renforcement des fonds propres bancaires (et de mesures complémentaires) pour concilier stabilité financière, performance et bon fonctionnement des banques," Post-Print dumas-00643745, HAL.

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