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Bank Capital Regulation With Random Audits

  • Sudipto Bhattacharya
  • Manfred Plank
  • Josef Zechner
  • Gunter Strobl

We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the banks asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholder/mangers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the ban, and of the auditing frequency are examined

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp354.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp354.

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Date of creation: Aug 2000
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Handle: RePEc:fmg:fmgdps:dp354
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  2. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, vol. 51(3), pages 439-52, July.
  3. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
  4. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Fries, Steven & Mella-Barral, Pierre & Perraudin, William, 1997. "Optimal bank reorganization and the fair pricing of deposit guarantees," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 441-468, April.
  6. Bhattacharya, Sudipto, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-84, May.
  7. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
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