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Ex Ante versus Ex Post Regulation of Bank Capital

Author

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  • Dr Arup Daripa

    () (Department of Economics - Birbeck College, University of London)

  • Dr. Simone Varotto

    () (ICMA Centre, University of Reading)

Abstract

The current debate on the new Basel Accord gives rise to a natural question about the appropriate form of capital regulation. We construct a general framework to study this issue. We show that ex ante regulation wastes the expertise of a bank in measuring its risk exposure, while an ex post regime makes full use of it. However, the latter is more vulnerable to the problem of unknown managerial risk preference. The results imply that the two regimes are complements, rather than substitutes. Further, under plausible conditions, an ex post regime emerges as the dominant element of the optimal combination. We use the results to shed light on current policy concerns.

Suggested Citation

  • Dr Arup Daripa & Dr. Simone Varotto, 2004. "Ex Ante versus Ex Post Regulation of Bank Capital," ICMA Centre Discussion Papers in Finance icma-dp2004-12, Henley Business School, Reading University.
  • Handle: RePEc:rdg:icmadp:icma-dp2004-12
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2004-13.pdf
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    References listed on IDEAS

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    Cited by:

    1. Dalla Pellegrina Lucia & Saraceno Margherita, 2011. "Securities Class Actions: A Helping Hand for Bank Regulators in Trouble?," Review of Law & Economics, De Gruyter, vol. 7(1), pages 214-242, July.
    2. Le Pape, Nicolas & Zhao, Kai, 2014. "Horizontal mergers and uncertainty," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-31.

    More about this item

    Keywords

    Ex Ante Regulation; Ex Post Regulation; Asymmetric Information; Safety Loss; Overportection; Loss; Safety Bias; Basel II;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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