Tailoring Bank Capital Regulation for Tail Risk
AbstractThe experience of the 2007-09 financial crisis has showed that the bank capital regulation in place was inadequate to deal with "manufacturing" tail risk in the financial sector. This paper proposes an incentive-based design of bank capital regulation aimed at efficiently dealing with tail risk engendered by bank top managers. It has two specific features: (i) first, it incorporates information on the optimal incentive contract between bank shareholders and bank managers, thereby dealing with the internal agency problem; (ii) second, it relies on the mechanism of mandatory recapitalization to ensure this contract is adopted by bank shareholders.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00796490.
Date of creation: Feb 2013
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00796490
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
capital requirements; tail risk; recapitalization; incentive compensation; moral hazard;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-16 (All new papers)
- NEP-BAN-2013-03-16 (Banking)
- NEP-CBA-2013-03-16 (Central Banking)
- NEP-CTA-2013-03-16 (Contract Theory & Applications)
- NEP-RMG-2013-03-16 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Decamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoit, 2004.
"The three pillars of Basel II: optimizing the mix,"
Journal of Financial Intermediation,
Elsevier, vol. 13(2), pages 132-155, April.
- Enrico Perotti & Lev Ratnovski & Razvan Vlahu, 2011.
"Capital Regulation and Tail Risk,"
Tinbergen Institute Discussion Papers
11-039/2/DSF14, Tinbergen Institute, revised 31 Mar 2011.
- Perotti, Enrico C & Ratnovski, Lev & Vlahu, Razvan, 2011. "Capital Regulation and Tail Risk," CEPR Discussion Papers 8526, C.E.P.R. Discussion Papers.
- Enrico Perotti & Lev Ratnovski & Razvan Vlahu, 2011. "Capital Regulation and Tail Risk," DNB Working Papers 307, Netherlands Central Bank, Research Department.
- International Monetary Fund, 2011. "Capital Regulation and Tail Risk," IMF Working Papers 11/188, International Monetary Fund.
- Biais, Bruno & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2007.
"Large Risks, Limited Liability and Dynamic Moral Hazard,"
IDEI Working Papers
472, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2009.
- Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, 01.
- Bhattacharya, Sudipto & Plank, Manfred & Strobl, Gunter & Zechner, Josef, 2002.
"Bank capital regulation with random audits,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 26(7-8), pages 1301-1321, July.
- Bhattacharya, Sudipto & Plank, Manfred & Strobl, Günter & Zechner, Josef, 2000. "Bank Capital Regulation with Random Audits," CEPR Discussion Papers 2597, C.E.P.R. Discussion Papers.
- Sudipto Bhattacharya & Manfred Plank & Josef Zechner & Gunter Strobl, 2000. "Bank Capital Regulation With Random Audits," FMG Discussion Papers dp354, Financial Markets Group.
- Chen, Carl R. & Steiner, Thomas L. & Whyte, Ann Marie, 2006. "Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 915-945, March.
- Rochet, Jean Charles & Villeneuve, Stéphane, 2004.
"Liquidity Risk and Corporate Demand for Hedging and Insurance,"
CEPR Discussion Papers
4755, C.E.P.R. Discussion Papers.
- Rochet, Jean-Charles & Villeneuve, Stéphane, 2004. "Liquidity Risk and Corporate Demand for Hedging and Insurance," IDEI Working Papers 254, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jean‐Paul Décamps & Thomas Mariotti & Jean‐Charles Rochet & Stéphane Villeneuve, 2011. "Free Cash Flow, Issuance Costs, and Stock Prices," Journal of Finance, American Finance Association, vol. 66(5), pages 1501-1544, October.
- Rochet, Jean-Charles & Villeneuve, Stéphane, 2011. "Liquidity management and corporate demand for hedging and insurance," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 303-323, July.
- Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
- Bris, Arturo & Cantale, Salvatore, 2004. "Bank capital requirements and managerial self-interest," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(1), pages 77-101, February.
- Koziol, Christian & Lawrenz, Jochen, 2012. "Contingent convertibles. Solving or seeding the next banking crisis?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 90-104.
- Samu Peura & Jussi Keppo, 2006. "Optimal Bank Capital with Costly Recapitalization," The Journal of Business, University of Chicago Press, vol. 79(4), pages 2163-2202, July.
- Mohamed Belhaj, 2011. "Excess capital, operational disaster risk, and capital requirements for banks," Quantitative Finance, Taylor & Francis Journals, vol. 11(5), pages 653-661.
- Décamps, Jean-Paul & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2008. "Free Cash-Flow, Issuance Costs and Stock Price Volatility," IDEI Working Papers 518, Institut d'Économie Industrielle (IDEI), Toulouse.
- Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 957-984.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.