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Crises and Capital Requirements in Banking

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Author Info
Lucy White
Alan D. Morrison ()

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Abstract

We analyse a general equilibrium model in which there is both adverse selection of and moral hazard by banks. The regulator has several tools at her disposal to combat these problems. She can audit banks to learn their type prior to giving them a licence, she can audit them ex post to learn the success probability of their projects, and she can impose capital adequacy requirements. When the regulator has a strong reputation for ex ante auditing she uses capital requirements to combat moral hazard problems. For less competent regulators, capital requirements substitute for ex ante auditing ability. In this case the banking system exhibits multiple equilibria so that crises of confidence in the banking system can occur. Contrary to conventional wisdom, the appropriate response to a crisis of confidence may be to tighten capital requirements to improve the quality of surviving banks.

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Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2002fe05.

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Date of creation: 2002
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Handle: RePEc:sbs:wpsefe:2002fe05

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  1. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December. [Downloadable!] (restricted)
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  2. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
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  3. Bhattacharya, Sudipto, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-84, May. [Downloadable!] (restricted)
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  5. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Amadou N. R. Sy & Jorge A. Chan-Lau, 2006. "Distance-to-Default in Banking: A Bridge Too Far?," IMF Working Papers 06/215, International Monetary Fund. [Downloadable!]
  2. Alan D. Morrison, 2004. "Life Insurance: Regulation as Contract Enforcement," OFRC Working Papers Series 2004fe09, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  3. Alan D. Morrison & Lucy White, 2004. "Is Deposit Insurance a Good Thing, and If So, Who Should Pay for It?," OFRC Working Papers Series 2004fe08, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  4. Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  5. Alan D. Morrison & Lucy White, 2004. "Financial Liberalisation and Capital Regulation in Open Economies," OFRC Working Papers Series 2004fe10, Oxford Financial Research Centre. [Downloadable!]
  6. Luc Laeven & Ross Levine, 2008. "Bank Governance, Regulation, and Risk Taking," NBER Working Papers 14113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Lóránth, Gyöngyi & Morrison, Alan, 2003. "Multinational Bank Regulation with Deposit Insurance and Diversification Effects," CEPR Discussion Papers 4148, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. KOBAYASHI Keiichiro & YANAGAWA Noriyuki, 2008. "Banking Crisis and Borrower Productivity," Discussion papers 08003, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  9. Arnoud W.A. Boot & Matej Marinc, . "Competition and Entry in Banking: Implications for Stability and Capital Regulation," Tinbergen Institute Discussion Papers 06-015/2, Tinbergen Institute. [Downloadable!]
    Other versions:
  10. Hendrik Hakenes & Isabel Schnabel, 2006. "Bank Size and Risk-Taking under Basel II," Discussion Papers 88, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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  11. TCHANA TCHANA , Fulbert, 2008. "The Empirics of Banking Regulation," MPRA Paper 9299, University Library of Munich, Germany. [Downloadable!]
  12. Alexis Derviz, 2007. "Cross-Border Risk Transmission by a Multinational Bank," AUCO Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 87-111, March. [Downloadable!]
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  13. Farhi, Emmanuel & Lerner, Josh & Tirole, Jean, 2008. "Fear of Rejection? Tiered Certification and Transparency," IDEI Working Papers 534, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  14. Hege, Ulrich & Feess, Eberhard, 2007. "Basel II and the Value of Bank Differentiation," Les Cahiers de Recherche 879, HEC Paris. [Downloadable!]
  15. Alan D. Morrison, 2002. "The Economics of Capital Regulation in Financial Conglomerates," OFRC Working Papers Series 2002fe08, Oxford Financial Research Centre. [Downloadable!]
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  16. Keiichiro Kobayashi & Noriyuki Yanagawa, 2007. "Bank Distress and the Borrowers' Productivity," CIRJE F-Series CIRJE-F-521, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  17. Eberhard Feess & Ulrich Hege, 2004. "The Basel II Accord: Internal Ratings and Bank Differentiation," CFS Working Paper Series 2004/25, Center for Financial Studies. [Downloadable!]
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