Bank regulation under nonbinding capital guidelines

✍ Scribed by Sarah B. Kendall

• Book ID: 104626212
• Publisher: Springer
• Year: 1992
• Tongue: English
• Weight: 629 KB
• Volume: 5
• Category: Article
• ISSN: 0920-8550
• DOI: 10.1007/bf00115322

✦ Synopsis

A one-period model of bank equity is presented in which the end of the period can be interpreted as the next regulatory examination. A capital guideline is in place that may or may not be met as the values of the bank's assets and liabilities fluctuate during the period. If the guideline is not met at the time of examination, however, equityholders bear some cost. The bank's risk-taking incentives between examinations are studied. The model suggests that higher capital guidelines may cause riskier bank behavior at some points in time, but do not imply a trend toward a riskier banking system. I thank Mark Levonian, Donald Hester, Robert Eisenbeis, and two anonymous referees for helpful suggestions, and David Toscano and Lisa Tsai for research assistance. Any remaining errors are mine.