Capital Regulation and Tail Risk
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Summary:
The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.
Series:
Working Paper No. 2011/188
Subject:
Bank regulation Banking Capital adequacy requirements Countercyclical capital buffers Financial crises Financial regulation and supervision Tax incentives
English
Publication Date:
August 1, 2011
ISBN/ISSN:
9781462308262/1018-5941
Stock No:
WPIEA2011188
Pages:
38
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