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Capital Regulation and Risk Sharing: Commentary

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  • Gale, Douglas

Abstract

Minimum capital requirements are one of the three "pillars" of macro-prudential regulation. As a result of the financial crisis of 2008-09, there have been proposals to increase the amount of capital banks are required to hold. A capital structure that contains a substantial amount of equity has a number of advantages. It reduces the bank's vulnerability to market freezes; it reduces the risk of contagion to other financial institutions; it reduces the subsidy provided by deposit insurance; and, as we have recently seen, shareholders are less likely to be bailed out by government than debt holders. But while it may be optimal to have a substantial amount of equity in the capital structure, the crucial question is "How much?" Will banks choose the right capital structure, left to themselves, or does the government have to force them to raise more capital?

Suggested Citation

  • Gale, Douglas, 2010. "Capital Regulation and Risk Sharing: Commentary," Working Papers 11-10, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-10
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    File URL: http://fic.wharton.upenn.edu/fic/papers/11/11-10.pdf
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    Cited by:

    1. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2021. "Capital requirements, risk-taking and welfare in a growing economy," Journal of Regulatory Economics, Springer, vol. 60(2), pages 167-192, December.
    2. Abou-El-Sood, Heba, 2021. "Board gender diversity, power, and bank risk taking," International Review of Financial Analysis, Elsevier, vol. 75(C).
    3. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2017. "Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 2126-2177.
    4. Di Nicolo, G. & Gamba, A. & Lucchetta, M., 2011. "Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking," Other publications TiSEM 58ac9f00-92d7-497b-a76f-e, Tilburg University, School of Economics and Management.
    5. Toni Ahnert, 2016. "Rollover Risk, Liquidity and Macroprudential Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1753-1785, December.
    6. Fraccaroli, Nicolò & Sowerbutts, Rhiannon & Whitworth, Andrew, 2020. "Does regulatory and supervisory independence affect financial stability?," Bank of England working papers 893, Bank of England.
    7. Ahmad Peivandi & Mohammad Abbas Rezaei & Ajay Subramanian, 2023. "Optimal design of bank regulation under aggregate risk," Mathematics and Financial Economics, Springer, volume 17, number 2, March.
    8. Hasman, Augusto & Samartín, Margarita, 2022. "Leaving the darkness: The emergence of shadow banks," Journal of Financial Stability, Elsevier, vol. 61(C).
    9. Cardot-Martin, Raphaël & Labondance, Fabien & Refait-Alexandre, Catherine, 2022. "Capital ratios and banking crises in the European Union," International Economics, Elsevier, vol. 172(C), pages 389-402.
    10. Leonid Katranzhy & Oleksandr Podskrebko & Vitaliy Krasko, 2018. "Modelling The Dynamics Of The Adequacy Of Bank'S Regulatory Capital," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 4(1).
    11. Hasman, Augusto & Samartín, Margarita, 2024. "Competition, coinsurance and moral hazard in banking," Journal of Banking & Finance, Elsevier, vol. 164(C).
    12. Hasman, Augusto & Samartín, Margarita, 2023. "Government intervention, linkages and financial fragility," Economic Modelling, Elsevier, vol. 126(C).
    13. Meylis Orazov, 2023. "The Interaction of Monetary and Macroprudential Policies in the Presence of Financial Frictions," Russian Journal of Money and Finance, Bank of Russia, vol. 82(4), pages 3-43, December.
    14. Amira Hakim & Eleftherios Thalassinos, 2021. "Risk Sharing, Macro-Prudential Policy and Welfare in an Overlapping Generations Model (OLG) Economy," European Research Studies Journal, European Research Studies Journal, vol. 0(4B), pages 585-611.
    15. Nielsen, Carsten Krabbe & Weinrich, Gerd, 2023. "Bank regulation and market structure," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    16. Michaelides, Alexander & Mankart, Jochen & Pagratis, Spyros, 2014. "A Dynamic Model of Banking with Uninsurable Risks and Regulatory Constraints," CEPR Discussion Papers 10299, C.E.P.R. Discussion Papers.
    17. Mikhail Andreev & M. Udara Peiris & Aleksandr Shirobokov & Dimitrios P. Tsomocos, 2019. "Macroprudential Policy and Financial (In)Stability Analysis in the Russian Federation," Russian Journal of Money and Finance, Bank of Russia, vol. 78(3), pages 3-37, September.
    18. Quang T. T. Nguyen & Son T. B. Nguyen & Quang V. Nguyen, 2019. "Can Higher Capital Discipline Bank Risk: Evidence from a Meta-Analysis," JRFM, MDPI, vol. 12(3), pages 1-21, August.
    19. Dwyer, Gerald P. & Hasman, Augusto & Samartín, Margarita, 2022. "Surety bonds and moral hazard in banking," Journal of Financial Stability, Elsevier, vol. 62(C).
    20. Huang, Qiubin & de Haan, Jakob & Scholtens, Bert, 2020. "Does bank capitalization matter for bank stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

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