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Tailoring Bank Capital Regulation for Tail Risk

Author

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  • Nataliya Klimenko

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

The experience of the 2007-09 financial crisis has showed that the bank capital regulation in place was inadequate to deal with "manufacturing" tail risk in the financial sector. This paper proposes an incentive-based design of bank capital regulation aimed at efficiently dealing with tail risk engendered by bank top managers. It has two specific features: (i) first, it incorporates information on the optimal incentive contract between bank shareholders and bank managers, thereby dealing with the internal agency problem; (ii) second, it relies on the mechanism of mandatory recapitalization to ensure this contract is adopted by bank shareholders.

Suggested Citation

  • Nataliya Klimenko, 2013. "Tailoring Bank Capital Regulation for Tail Risk," Working Papers halshs-00796490, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00796490
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00796490
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    References listed on IDEAS

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    Keywords

    recapitalization; incentive compensation; moral hazard; capital requirements; tail risk;
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