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Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection

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  • Chuen-Ping Chang
  • Shi Chen

Abstract

We study the optimal bank interest margin and default risk under the capped ratio schedule of government capital instruments in the Basel III Capital Adequacy Accord and the Deposit Insurance Fund arrangement program. We show that an increase in the capped ratio (a decrease in the capped government capital injection) increases the default risk in the bank¡¯s equity return at a reduced interest margin. Regulatory deposit insurance fund protection reinforces the reduced bank interest margin and the increased default risk. The capped ratio schedule as well as the fund protection program makes the bank more prone to loan risk-taking, thereby adversely affecting the stability of banking system. This paper suggests that the two means of government intervention in response to the recent financial crisis might be not appropriate for a bank in distress, particularly from the standpoint of bank failure.

Suggested Citation

  • Chuen-Ping Chang & Shi Chen, 2015. "Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(1), pages 14-21, January.
    • Handle: RePEc:jfr:ijfr11:v:6:y:2015:i:1:p:14-21
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    References listed on IDEAS

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