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When Basle II doesn't work: Contingency Rules versus Fixed Requirements


  • W. Bolt
  • A.F. Tieman


Under the new Basle Capital Accords, regulation takes the form of a contingency rule prescribing a certain level of bank capital contingent on the bank's risk taking behaviour in choosing its asset portfolio. In a simple dynamic model of banking with binding regulation we show that such Basle II regulation is Pareto inferior to regulation by a fixed capital requirement if and only if some condition on elasticities is satisfied. We provide a simple example to illustrate our findings.

Suggested Citation

  • W. Bolt & A.F. Tieman, 2001. "When Basle II doesn't work: Contingency Rules versus Fixed Requirements," WO Research Memoranda (discontinued) 681, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:681

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    References listed on IDEAS

    1. Jack High (ed.), 2001. "Competition," Books, Edward Elgar Publishing, number 1751.
    2. Gary Gorton & Andrew Winton, "undated". "Bank Capital Regulation in General Equilibrium," Rodney L. White Center for Financial Research Working Papers 17-95, Wharton School Rodney L. White Center for Financial Research.
    3. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 745-770, November.
    4. P.J.G. Vlaar, 2000. "Capital requirements and competition in the banking industry," WO Research Memoranda (discontinued) 634, Netherlands Central Bank, Research Department.
    5. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
    6. Wilko Bolt & Alexander F. Tieman, 2004. "Banking Competition, Risk and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 783-804, December.
    7. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, July.
    8. Peter Vlaar, 2000. "Capital requirements and competition in banking industry," Working Paper Series WP-00-18, Federal Reserve Bank of Chicago.
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    More about this item


    capital adequacy requirements; contingency rules; Basle II;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure


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