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How Does the Stock Market View Bank Regulatory Capital Forbearance Policies?

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  • VAN SON LAI
  • XIAOXIA YE

Abstract

During the subprime crisis, the FDIC has shown, once again, laxity in resolving and closing insolvent institutions. Ronn and Verma (1986) call the tolerance level below which a bank closure is triggered the regulatory policy parameter. We derive a model in which we make this parameter stochastic and bank-specific to infer the stock market view of the regulatory capital forbearance value. For 565 U.S. listed banks during 1990 to 2012, the countercyclical forbearance fraction in capital, most substantial in recessions, could represent 17%, on average, of the market valuation of bank equity and could go as high as 100%

Suggested Citation

  • Van Son Lai & Xiaoxia Ye, 2019. "How Does the Stock Market View Bank Regulatory Capital Forbearance Policies?," Working Papers 2019-012, Department of Research, Ipag Business School.
    • Handle: RePEc:ipg:wpaper:2019-012
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    More about this item

    Keywords

    Bank regulatory closure rules or policy parameter; bank insolvency; regulatory forbearance; market-based closure rules; financial crises;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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