IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-00720794.html
   My bibliography  Save this paper

Bank behaviour, financial fragility and prudential regulation

Author

Listed:
  • Eric Nasica

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • Olivier Bruno

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • André Cartapanis

    (CHERPA - Croyance, Histoire, Espace, Régulation Politique et Administrative - AMU - Aix Marseille Université - Institut d'Études Politiques [IEP] - Aix-en-Provence)

Abstract

We develop a model of banking to show that financial fragility can emerge through banks optimal decision of profit maximisation even if banks meet the requirements laid down by the Basel II accord. Our results are twofold. First, we show that a risk sensitive micro prudential regulation, as the one of Basel II, cannot prevent the rise in financial fragility due to bank behaviour. In a period of expansion, characterized by assets bubble, bank optimal behaviour leads to an increase in leverage that induce a rise in financial fragility. Consequently, a constraint on a maximum leverage ratio seems to be justified if one wants to prevent financial fragility. This is the road follows by the new Basel III macro prudential regulation that wants to impose to bank a maximum leverage of 33. However, our second result stresses that the value of leverage that maximizes financial stability is not constant with the cycle. It means that the regulator must adjust this ratio in order for it to be efficient. Moreover, we show also that a restriction on leverage, that can improve financial stability, is detrimental to the level of financing in the economy. Consequently, there is a trade-off between financial stability and credit availability that must be considered by the regulation authority.

Suggested Citation

  • Eric Nasica & Olivier Bruno & André Cartapanis, 2010. "Bank behaviour, financial fragility and prudential regulation," Post-Print halshs-00720794, HAL.
  • Handle: RePEc:hal:journl:halshs-00720794
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. André Cartapanis, 2011. "La crise financière et les politiques macroprudentielles. Inflexion réglementaire ou nouveau paradigme ?," Revue économique, Presses de Sciences-Po, vol. 62(3), pages 349-382.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00720794. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.