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Optimal Bank Capital Requirements: An Asymmetric Information Perspective

Author

Listed:
  • Berardi, Simone

    (LUISS School of European Political Economy)

  • Marcelletti, Alessandra

    () (LUISS School of European Political Economy)

Abstract

The issue on the amount of capital banks should hold has pushed back the debate on top of policymakers' agenda. Literature on this field mainly focuses on how to prevent banks from gaming risk-weighted capital requirements. The analysis has provided different types of solutions, such as the introduction of penalties and complementary use of risk-sensitive capital requirements and leverage ratio. Although the majority of theoretical papers rely on an asymmetric information framework, only one source of asymmetry is taken into account. The paper fills this gap by studying how to implement a socially optimal regulation scheme that simultaneously faces moral hazard and adverse selection problems. Including both sources of asymmetry is crucial because of the supervisor's inability to distinguish between risk profiles and misconduct (risk-shifting behavior) of banks.

Suggested Citation

  • Berardi, Simone & Marcelletti, Alessandra, 2017. "Optimal Bank Capital Requirements: An Asymmetric Information Perspective," SEP Working Papers 2017/2, LUISS School of European Political Economy.
  • Handle: RePEc:ris:sepewp:2017_002
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    bank capital requirements; bank regulation; moral hazard; adverse selection;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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