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Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994

  • Armen Hovakimian

    (Baruch College)

  • Edward J. Kane

    (Baruch College)

Unless priced and administered appropriately, a governmental safety net enhances risk-shifting opportunities for banks. This paper quantifies regulatory efforts to use capital requirements to control risk-shifting by U.S. banks during 1985 to 1994 and investigates how much risk-based capital requirements and other deposit-insurance reforms improved this control. We find that capital discipline did not prevent large banks from shifting risk onto the safety net. Banks with low capital and debt-to-deposits ratios overcame outside discipline better than other banks. Mandates introduced by 1991 legislation have improved but did not establish full regulatory control over bank risk-shifting incentives. Copyright The American Finance Association 2000.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 55 (2000)
Issue (Month): 1 (02)
Pages: 451-468

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Handle: RePEc:bla:jfinan:v:55:y:2000:i:1:p:451-468
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