In this paper, we introduce a new requirement for bank capital: banking-on-the-average rules. Under these rules a bank’s required level of equity capital is monotonically increasing in the realized equity capital of its peers. In a simple model we illustrate the workings of banking-on-the-average rules. We show that in booms these rules can prevent banks from taking excessive risks. Moreover, they alleviate the socially harmful procyclicality of conventional equity-capital rules, which may induce banks to cut back excessively on lending. Finally, we argue that under these rules prudent banks can impose prudency on other banks. In addition, banking-on-the-average rules ensure the build-up of bank equity capital in booms and thus avoid excessive leverage.
|Date of creation:||May 2010|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hans Gersbach & Volker Hahn, 2009.
CER-ETH Economics working paper series
09/107, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
- Gersbach, Hans & Hahn, Volker, 2010. "Banking-on-the-Average Rules," CEPR Discussion Papers 7819, C.E.P.R. Discussion Papers.
- Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
- Martin Hellwig, 2009. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," De Economist, Springer, vol. 157(2), pages 129-207, June.
- Martin Hellwig, 2008. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_43, Max Planck Institute for Research on Collective Goods.
- Gersbach, Hans, 2004. "Financial Intermediation with Contingent Contracts and Macroeconomic Risks," CEPR Discussion Papers 4735, C.E.P.R. Discussion Papers.
- Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
- Skander Van den Heuvel, 2005. "The Welfare Cost of Bank Capital Requirements," 2005 Meeting Papers 880, Society for Economic Dynamics.
- Scott, Hal S. (ed.), 2005. "Capital Adequacy beyond Basel: Banking, Securities, and Insurance," OUP Catalogue, Oxford University Press, number 9780195169713, April.
- Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
- Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-419, June.
- R. Alton Gilbert & Courtenay C. Stone & Michael E. Trebing, 1985. "The new bank capital adequacy standards," Review, Federal Reserve Bank of St. Louis, issue May, pages 12-20.
- Tolga Ediz & Ian Michael & William Perraudin, 1998. "The impact of capital requirements on U.K. bank behaviour," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 15-22.
- Gersbach, Hans, 2009. "Private Insurance Against Systemic Crises?," CEPR Discussion Papers 7342, C.E.P.R. Discussion Papers. Full references (including those not matched with items on IDEAS)