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Ex Ante versus Ex Post Regulation of Bank Capital

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Author Info
Dr Arup Daripa () (Department of Economics - Birbeck College, University of London)
Dr. Simone Varotto () (ICMA Centre, University of Reading)

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Abstract

The current debate on the new Basel Accord gives rise to a natural question about the appropriate form of capital regulation. We construct a general framework to study this issue. We show that ex ante regulation wastes the expertise of a bank in measuring its risk exposure, while an ex post regime makes full use of it. However, the latter is more vulnerable to the problem of unknown managerial risk preference. The results imply that the two regimes are complements, rather than substitutes. Further, under plausible conditions, an ex post regime emerges as the dominant element of the optimal combination. We use the results to shed light on current policy concerns.

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Publisher Info
Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2004-12.

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Length: 48 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2004-12

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Related research
Keywords: Ex Ante Regulation; Ex Post Regulation; Asymmetric Information; Safety Loss; Overportection; Loss; Safety Bias; Basel II;

Other versions of this item:

Find related papers by JEL classification:
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

References listed on IDEAS
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