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Robust capital regulation

Author

Listed:
  • Viral V. Acharya
  • Hamid Mehran
  • Til Schuermann
  • Anjan V. Thakor

Abstract

Regulators and markets can find the balance sheets of large financial institutions difficult to penetrate, and they are mindful of how undercapitalization can create incentives to take on excessive risk. This study proposes a novel framework for capital regulation that addresses banks' incentives to take on excessive risk and leverage. The framework consists of a special capital account in addition to a core capital requirement. The special account would accrue to a bank's shareholders as long as the bank is solvent, but would pass to the bank's regulators?rather than its creditors?if the bank fails. By design, this special account thus limits risk taking, but ensures that creditors' disciplining incentives are preserved.

Suggested Citation

  • Viral V. Acharya & Hamid Mehran & Til Schuermann & Anjan V. Thakor, 2012. "Robust capital regulation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 18(May).
    • Handle: RePEc:fip:fednci:y:2012:i:may:n:v.18no.4
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    References listed on IDEAS

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    Cited by:

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    2. Bunkanwanicha, Pramuan & Gupta, Jyoti & Wiwattanakantang, Yupana, 2016. "Pyramidal group structure and bank risk in Thailand," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 272-288.
    3. Markus Behn & Rainer Haselmann & Paul Wachtel, 2016. "Procyclical Capital Regulation and Lending," Journal of Finance, American Finance Association, vol. 71(2), pages 919-956, April.
    4. Jyh-Horng Lin & Pei-Chi Lii & Fu-Wei Huang & Shi Chen, 2019. "Cross-Border Lending, Government Capital Injection, and Bank Performance," IJFS, MDPI, vol. 7(2), pages 1-20, April.
    5. Mathias Lé, 2013. "Deposit Insurance Adoption and Bank Risk-Taking: the Role of Leverage," PSE Working Papers halshs-00911415, HAL.
    6. Chen, Shi & Lin, Ku-Jun, 2016. "Effects of government capital injection on bank and bank-dependent borrower," Economic Modelling, Elsevier, vol. 52(PB), pages 618-629.
    7. Viral V. Acharya & Hamid Mehran & Anjan V. Thakor, 2016. "Caught between Scylla and Charybdis? Regulating Bank Leverage When There Is Rent Seeking and Risk Shifting," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(1), pages 36-75.
    8. repec:zbw:bofrdp:2014_025 is not listed on IDEAS
    9. Iftekhar Hasan & Suk-Joong Kim & Eliza Wu, 2018. "The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 16, pages 547-603, World Scientific Publishing Co. Pte. Ltd..
    10. Monika Bucher & Diemo Dietrich & Achim Hauck, 2019. "Implications of bank regulation for loan supply and bank stability: a dynamic perspective," The European Journal of Finance, Taylor & Francis Journals, vol. 25(16), pages 1527-1550, November.
    11. Sumera Anis & Abdul Rashid, 2017. "Optimal Bank Capital And Impact Of The Mm Theorem: A Study Of The Pakistani Financial Sector," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 1-21, June.
    12. Iftekhar Hasan & Suk-Joong Kim & Eliza Wu, 2018. "The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 16, pages 547-603, World Scientific Publishing Co. Pte. Ltd..
    13. Thi Mai Luong, 2020. "Selection Effects of Lender and Borrower Choices on Risk Measurement, Management and Prudential Regulation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2020, January-A.
    14. Hasan, Iftekhar & Hassan, Gazi & Kim, Suk-Joong & Wu, Eliza, 2021. "The real impact of ratings-based capital rules on the finance-growth nexus," International Review of Financial Analysis, Elsevier, vol. 73(C).
    15. Jyh-Horng Lin & Shi Chen & Fu-Wei Huang, 2018. "Bank Interest Margin, Multiple Shadow Banking Activities, and Capital Regulation," IJFS, MDPI, vol. 6(3), pages 1-20, July.
    16. Hogan, Thomas L., 2015. "Capital and risk in commercial banking: A comparison of capital and risk-based capital ratios," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 32-45.
    17. Jou, Rosemary & Chen, Shi & Tsai, Jeng-Yan, 2017. "Politically connected lending, government capital injection, and bank performance," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 220-232.
    18. Changjun Zheng & Syed Moudud-Ul-Huq, 2017. "Banks’ capital regulation and risk: Does bank vary in size? Empirical evidence from Bangladesh," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-27, June.
    19. Li, Xuelian & Lin, Jyh-Horng, 2016. "Shadow-banking entrusted loan management, deposit insurance premium, and capital regulation," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 98-109.
    20. Chen, Shi & Lin, Ku-Jun, 2015. "Technology choice and bank performance with government capital injection under deposit insurance fund protection," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 162-174.
    21. Nguyen, Quang Thi Thieu & Gan, Christopher & Li, Zhaohua, 2019. "Bank capital regulation: How do Asian banks respond?," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Risk management; Assets (Accounting); Bank capital; Bank supervision;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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