Tailoring Bank Capital Regulation for Tail Risk

Nataliya Klimenko
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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

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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.

Keywords: recapitalization; incentive compensation; moral hazard; capital requirements; tail risk (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta and nep-rmg
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