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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. Andrew G. Haldane, 2012. "Control Rights (And Wrongs)," Economic Affairs, Wiley Blackwell, Wiley Blackwell, vol. 32(2), pages 47-58, 06.
  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. Itai Agur, 2011. "Bank Risk within and across Equilibria," DNB Working Papers, Netherlands Central Bank, Research Department 305, Netherlands Central Bank, Research Department.
  4. Mariathasan, Mike & Merrouche, Ouarda, 2014. "The manipulation of basel risk-weights," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 23(3), pages 300-321.
  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, Board of Governors of the Federal Reserve System (U.S.) 1083, Board of Governors of the Federal Reserve System (U.S.).
  6. Maria J. Nieto & Gillian G. Garcia, 2012. "The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe?," FMG Special Papers, Financial Markets Group sp209, Financial Markets Group.
  7. Altunbas, Yener & Marqués-Ibáñez, David & Manganelli, Simone, 2011. "Bank risk during the financial crisis: do business models matter?," Working Paper Series, European Central Bank 1394, European Central Bank.
  8. Stefan Arping, 2014. "Does Competition make Banks more Risk-seeking?," Tinbergen Institute Discussion Papers 14-059/IV, Tinbergen Institute.
  9. Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," AMSE Working Papers 1310, Aix-Marseille School of Economics, Marseille, France, revised Feb 2013.
  10. Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," Working Papers, HAL halshs-00796490, HAL.
  11. Costas N. Kanellopoulos, 2012. "Employment and worker flows during the financial crisis," Economic Bulletin, Bank of Greece, Economic Research Department, Bank of Greece, Economic Research Department, issue 36, pages 31-41, April.
  12. Gola Carlo & Ilari Antonio, 2013. "Financial innovation oversight: a policy framework," Questioni di Economia e Finanza (Occasional Papers), Bank of Italy, Economic Research and International Relations Area 200, Bank of Italy, Economic Research and International Relations Area.
  13. 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, Emerald Group Publishing, vol. 20(2), pages 116-146, May.
  14. Natalya Martynova & Lev Ratnovski & Razvan Vlahu, 2014. "Franchise value and risk-taking in modern banks," DNB Working Papers, Netherlands Central Bank, Research Department 430, Netherlands Central Bank, Research Department.

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