Ex Ante versus Ex Post Regulation of Bank Capital
AbstractThe 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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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2004-12.
Length: 48 pages
Date of creation: Jun 2004
Date of revision:
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More information through EDIRC
Ex Ante Regulation; Ex Post Regulation; Asymmetric Information; Safety Loss; Overportection; Loss; Safety Bias; Basel II;
Other versions of this item:
- Arup Daripa & Simone Varotto, 2005. "Ex Ante Versus Ex Post Regulation of Bank Capital," Finance 0511009, EconWPA.
- Arup Daripa & Simone Varotto, 2005. "Ex Ante Versus Ex Post Regulation of Bank Capital," Birkbeck Working Papers in Economics and Finance 0518, Birkbeck, Department of Economics, Mathematics & Statistics.
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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