IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Prudent Banks and Creative Mimics: Can We Tell the Difference?

  • Andrew Powell

    ()

  • Marcus Miller
  • Antonia Maier

The recent financial crisis has forced a rethink of banking regulation and supervision and the role of financial innovation. This paper develops a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium, but deposit insurance will tend to increase the level of capital required. If supervision detects risky behavior ex ante then it is complementary to capital regulation. However, financial innovation may erode supervisors’ ability to detect risk and capital levels should then be higher. Regulators, however, may not be aware their capacities have been undermined. The paper argues for a four-prong policy response with higher bank capital ratios, enhanced supervision, limits to the use of complex financial instruments and Coco’s. The results may support the institutional arrangements proposed recently in the United Kingdom.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=36610137
Download Restriction: no

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4760.

as
in new window

Length:
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:idb:wpaper:4760
Contact details of provider: Postal: 1300 New York Avenue, NW, Washington, DC 20577
Phone: 202-623-1000
Web page: http://www.iadb.org/res
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  2. Li, Han Hao & Miller, Marcus & Zhang, Lei, 2011. "When bigger isn’t better: Bail outs and bank behaviour," CEPR Discussion Papers 8602, C.E.P.R. Discussion Papers.
  3. Besancenot, Damien & Vranceanu, Radu, 2009. "Banks’ risk race: a signaling explanation," ESSEC Working Papers DR 09007, ESSEC Research Center, ESSEC Business School.
  4. Maskin, Eric S., 2007. "Mechanism Design: How to Implement Social Goals," Nobel Prize in Economics documents 2007-4, Nobel Prize Committee.
  5. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2010. "Competition, Risk-Shifting, and Public Bail-out Policies," Working Papers 1003, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 14 Jan 2010.
  6. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  7. Hans-Werner Sinn, 2001. "Risk Taking, Limited Liability and the Competition of Bank Regulators," NBER Working Papers 8669, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:idb:wpaper:4760. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Monica Bazan)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.