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Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking

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  • Vollmer, Uwe
  • Wiese, Harald

Abstract

This paper analyzes the incentive effects of special bank resolution schemes which were introduced during the recent financial crisis. These schemes allow regulators to take control over a systemically important financial institution before bankruptcy. We ask how special resolution schemes influence banks’ risk-taking and whether regulators should combine them with minimum capital requirements. We model a single bank which is supervised by a regulator who receives an imperfect signal about the bank's probability of success. We find that capital requirements are better than resolution from a welfare point of view if the quality of the signal is low, if it is difficult for the bank to attract deposits, or if the project return is low.

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  • Vollmer, Uwe & Wiese, Harald, 2013. "Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 487-497.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:487-497
    DOI: 10.1016/j.jfs.2013.07.004
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    Cited by:

    1. Jose Fique, 2016. "A Microfounded Design of Interconnectedness-Based Macroprudential Policy," Staff Working Papers 16-6, Bank of Canada.
    2. Jose Fique, 2015. "A Microfounded Design of Interconnectedness-Based Macroprudential Regulation," CAEPR Working Papers 2015-008, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    3. Miguel Sarmiento, 2016. "Market Discipline and Liquidity Risk: Evidence from the Interbank Funds Market," IHEID Working Papers 14-2016, Economics Section, The Graduate Institute of International Studies.
    4. Vo, Nguyen Ngoc Thao & Nguyen, Thai Vu Hong & Phan, Duc Hong Thi, 2022. "Earnings management and bank risk-taking behavior in Asia-Pacific region," Research in International Business and Finance, Elsevier, vol. 63(C).
    5. Pessarossi, Pierre & Weill, Laurent, 2015. "Do capital requirements affect cost efficiency? Evidence from China," Journal of Financial Stability, Elsevier, vol. 19(C), pages 119-127.
    6. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
    7. Michael Diemer & Uwe Vollmer, 2015. "What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 251-277, December.
    8. José Alejandro Fernández Fernández, 2020. "Considerations of the SPE and MPE resolution," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(3), pages 278-287, September.

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    More about this item

    Keywords

    Bank resolution; Capital requirements; Financial crisis;
    All these keywords.

    JEL classification:

    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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