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Ex Ante versus Ex Post Regulation of Bank Capital

  • Dr Arup Daripa

    ()

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

  • Dr. Simone Varotto

    ()

    (ICMA Centre, University of Reading)

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.

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Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2004-12.

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Length: 48 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2004-12
Contact details of provider: Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
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Web page: http://www.henley.reading.ac.uk/
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