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Bank capital and risk taking

Author

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  • Alistair Milne
  • A Elizabeth Whalley

Abstract

Bank risk-taking and capitalisation is studied in a continuous time model with a closed form solution, assuming uncertain cash flow, random regulatory audit, and a constraint on equity issue. Capital reserves are built up towards a desired level as an insurance against the threat of liquidation. Risk-taking is a discontinuous function of the level of capital. A solution is derived for the liquidation rate in steady state and the determinants of charter value are investigated. Minimum capital standards are found to have little long-term impact on bank behaviour. Audit frequency is the principal tool for restraining moral hazard.

Suggested Citation

  • Alistair Milne & A Elizabeth Whalley, 1999. "Bank capital and risk taking," Bank of England working papers 90, Bank of England.
    • Handle: RePEc:boe:boeewp:90
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1999/wp90.pdf
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    References listed on IDEAS

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    Cited by:

    1. Joël Petey, 2004. "Les déterminants du risque d'insolvabilité dans l'industrie bancaire.. Une approche en termes de frontière de production," Recherches économiques de Louvain, De Boeck Université, vol. 70(4), pages 401-424.
    2. Jukka Isohätälä & Alistair Milne & Donald Robertson, 2020. "The Net Worth Trap: Investment and Output Dynamics in the Presence of Financing Constraints," Mathematics, MDPI, vol. 8(8), pages 1-32, August.
    3. repec:zbw:bofrdp:2007_033 is not listed on IDEAS
    4. Bülbül, Dilek & Lambert, Claudia, 2012. "Credit portfolio modelling and its effect on capital requirements," Discussion Papers 11/2012, Deutsche Bundesbank.
    5. Larsson, Bo & Wijkander, Hans, 2012. "Banking on Regulations?," Research Papers in Economics 2012:3, Stockholm University, Department of Economics.
    6. Kilponen, Juha & Milne, Alistair, 2007. "The lending channel under optimal choice of monetary policy," Bank of Finland Research Discussion Papers 33/2007, Bank of Finland.
    7. repec:zbw:bofrdp:2014_026 is not listed on IDEAS
    8. Kilponen, Juha & Milne, Alistair, 2007. "The lending channel under optimal choice of monetary policy," Research Discussion Papers 33/2007, Bank of Finland.
    9. Milne, Alistair, 2002. "Bank capital regulation as an incentive mechanism: Implications for portfolio choice," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 1-23, January.
    10. Ali, Abdelrahman Elzahi Saaid, 2016. "Poverty Alleviation through Microfinance in North-East Kenya Province," Working Papers 2016-9, The Islamic Research and Teaching Institute (IRTI).
    11. Ashraf, Dawood & Ramady, Mohamed & Albinali, Khalid, 2016. "Financial fragility of banks, ownership structure and income diversification: Empirical evidence from the GCC region," Research in International Business and Finance, Elsevier, vol. 38(C), pages 56-68.
    12. Isohätälä, Jukka & Milne, Alistair & Robertson, Donald, 2014. "The net worth trap: investment and output dynamics in the presence of financing constraints," Research Discussion Papers 26/2014, Bank of Finland.

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