Capital and liquidity in a dynamic model of banking

Augusto Hasman () and Margarita Samartín

Economic Modelling, 2017, vol. 64, issue C, 172-177

Abstract: This paper analyzes capital requirements in combination with a particular kind of cash reserves, that are invested in the risk-free asset, from now on, compensated reserves. We consider a dynamic framework of banking where competition may induce banks to gamble. In this set up, we can capture the two effects that capital regulation has on risk, the capital-at-risk effect and the franchise value effect (Hellman et al., 2000). We show that while capital alone is an inferior policy, compensated reserves, will complement capital requirements, by creating franchise value, and are therefore efficient in solving moral hazard problems.

Keywords: Capital requirements; Compensated reserves; Dynamic framework; Moral hazard (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:64:y:2017:i:c:p:172-177

DOI: 10.1016/j.econmod.2017.04.002

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