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Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking

  • Vollmer, Uwe
  • Wiese, Harald
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    This paper analyzes the incentive effects of special bank resolution schemes which were introduced during the recent financial crisis. These schemes allow regulators to take control over a systemically important financial institution before bankruptcy. We ask how special resolution schemes influence banks’ risk-taking and whether regulators should combine them with minimum capital requirements. We model a single bank which is supervised by a regulator who receives an imperfect signal about the bank's probability of success. We find that capital requirements are better than resolution from a welfare point of view if the quality of the signal is low, if it is difficult for the bank to attract deposits, or if the project return is low.

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    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 9 (2013)
    Issue (Month): 4 ()
    Pages: 487-497

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    Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:487-497
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    5. Avgouleas, Emilios & Goodhart, Charles & Schoenmaker, Dirk, 2013. "Bank Resolution Plans as a catalyst for global financial reform," Journal of Financial Stability, Elsevier, vol. 9(2), pages 210-218.
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    13. Tirole, Jean, 1993. "On Banking and Intermediation," IDEI Working Papers 31, Institut d'Économie Industrielle (IDEI), Toulouse.
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