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Robust capital regulation

  • Viral Acharya
  • Hamid Mehran
  • Til Schuermann
  • Anjan Thakor

Regulators and markets can find the balance sheets of large financial institutions difficult to penetrate, and they are mindful of how undercapitalization can create incentives to take on excessive risk. This study proposes a novel framework for capital regulation that addresses banks' incentives to take on excessive risk and leverage. The framework consists of a special capital account in addition to a core capital requirement. The special account would accrue to a bank's shareholders as long as the bank is solvent, but would pass to the bank's regulators—rather than its creditors—if the bank fails. By design, this special account thus limits risk taking, but ensures that creditors' disciplining incentives are preserved.

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Article provided by Federal Reserve Bank of New York in its journal Current Issues in Economics and Finance.

Volume (Year): 18 (2012)
Issue (Month): May ()
Pages:

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Handle: RePEc:fip:fednci:y:2012:i:may:n:v.18no.4
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  1. Viral V. Acharya & Hamid Mehran & Anjan Thakor, 2010. "Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting," Staff Reports 469, Federal Reserve Bank of New York.
  2. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports 502, Federal Reserve Bank of New York.
  3. Hamid Mehran & Anjan Thakor, 2009. "Bank capital and value in the cross section," Staff Reports 390, Federal Reserve Bank of New York.
  4. Viral Acharya & Tanju Yorulmazer, 2007. "Too many to fail - an analysis of time-inconsistency in bank closure policies," Bank of England working papers 319, Bank of England.
  5. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
  6. Viral V. Acharya & João A. C. Santos & Tanju Yorulmazer, 2010. "Systemic risk and deposit insurance premiums," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 89-99.
  7. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
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