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Capital Regulation and Tail Risk

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  • International Monetary Fund

Abstract

The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/188.

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Length: 38
Date of creation: 01 Aug 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/188

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Keywords: Risk management; Banks; Economic models; banker; capital regulation; recapitalization; banking; capital ratio; capital adjustment; bank capital; bank risk; bank risk-taking; capital requirement; capital adequacy; bank regulation; banking system; bank behavior; banking supervision; deposit insurance; bank charter; bank shareholders; capital markets; cost of capital; bank assets; prudential regulation; banking authority; banking industry; banking systems; bank capital regulation; present value; bank investment; bank equity; capital sufficiency; financial risk; bank run; banking system stability; bank closure; capital standards; moral hazard; capital position; bank takes; bank for international settlements; private capital; bank failure; bank incentives;

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References

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Citations

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Cited by:
  1. Stefan Arping, 2014. "Does Competition make Banks more Risk-seeking?," Tinbergen Institute Discussion Papers 14-059/IV, Tinbergen Institute.
  2. Chris Bloor & Rebecca Craigie & Anella Munro, 2012. "The macroeconomic effects of a stable funding requirement," Reserve Bank of New Zealand Discussion Paper Series DP2012/05, Reserve Bank of New Zealand.
  3. Gola Carlo & Ilari Antonio, 2013. "Financial innovation oversight: a policy framework," Questioni di Economia e Finanza (Occasional Papers) 200, Bank of Italy, Economic Research and International Relations Area.
  4. Altunbas, Yener & Marqués-Ibáñez, David & Manganelli, Simone, 2011. "Bank risk during the financial crisis: do business models matter?," Working Paper Series 1394, European Central Bank.
  5. Lamont Black & Ricardo Correa & Xin Huang & Hao Zhou, 2013. "The systemic risk of European banks during the financial and sovereign debt crises," International Finance Discussion Papers 1083, Board of Governors of the Federal Reserve System (U.S.).
  6. Costas N. Kanellopoulos, 2012. "Employment and worker flows during the financial crisis," Economic Bulletin, Bank of Greece, Economic Research Department, issue 36, pages 31-41, April.
  7. Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," Working Papers halshs-00796490, HAL.
  8. Maria J. Nieto & Gillian G. Garcia, 2012. "The insufficiency of traditional safety nets: what bank resolution fund for Europe?," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 20(2), pages 116-146, May.
  9. Maria J. Nieto & Gillian G. Garcia, 2012. "The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe?," FMG Special Papers sp209, Financial Markets Group.
  10. Andrew G. Haldane, 2012. "Control Rights (And Wrongs)," Economic Affairs, Wiley Blackwell, vol. 32(2), pages 47-58, 06.
  11. Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," AMSE Working Papers 1310, Aix-Marseille School of Economics, Marseille, France, revised Feb 2013.
  12. Mike Mariathasan & Ouarda Merrouche, 2012. "The Manipulation of Basel Risk-Weights. Evidence from 2007-10," Economics Series Working Papers 621, University of Oxford, Department of Economics.

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