Bank Debt Regulations Implications for Bank Capital and Bond Risk
AbstractWe use a structural model of default risk to study how optimal bank capital and bond risk are influenced by deposit insurance, implicit guarantees, depositor preference, asset encumbrance, and bail-in resolution frameworks. We find that these features of bank financing, in addition to having an immediate impact on bond debt risk, also change optimal bank capital, countering the first-order effect on bond debt risk. Bondholders' risk is thereby not materially affected, but shareholder value and public sector value are. A gap between optimal capital and required capital represents a cost to shareholders, and increases the risk of regulatory arbitrage. Enhancing capital requirements, and at the same time adopting bank debt regulations that reduce the optimal capital, is to gain some and lose some in terms of financial stability. Based on a small sample of European banks, we find support for the central model predictions.
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Bibliographic InfoPaper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 14813.
Length: 42 pages
Date of creation: 13 Jun 2013
Date of revision:
Bank debt regulations; optimal bank capital; bond risk.;
Find related papers by JEL classification:
- 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
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-24 (All new papers)
- NEP-BAN-2013-06-24 (Banking)
- NEP-CBA-2013-06-24 (Central Banking)
- NEP-RMG-2013-06-24 (Risk Management)
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