Dynamic Banking with Endogenous Risk Based Funding Cost: Value Maximization, Risk-taking, Responses to Regulation and Credit Contraction

Bo Larsson and Hans Wijkander ()
Additional contact information
Hans Wijkander: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

No 2015:3, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: We develop a stochastic dynamic model of bank value maximization under limited liability and in which bankruptcy can occur. Main issues are banks’ optimal responses to regulation and credit-losses. We show that risk-neutral banks behave as if they were risk-averse when they are under-capitalized. Risk-taking is always below that of single period value maximization under limited liability. We also show that banking regulations often have significant and adverse second-order effects through banks’ dynamic adjustment to regulations. The model gives rise to endogenous capital buffers and shows that it takes time to re-build bank capital after a credit-loss. That makes the model suitable to analysis of situations as the current post financial crisis period with large macroeconomic disturbances and credit contraction.

Keywords: Dynamic Banking; Banking regulation; Capital adequacy; Dividends; Incentive structure; Capital buffers; Bankruptcy (search for similar items in EconPapers)
JEL-codes: C61 G21 G22 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-03-09
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www2.ne.su.se/paper/wp15_03.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2015_0003

Access Statistics for this paper

More papers in Research Papers in Economics from Stockholm University, Department of Economics Department of Economics, Stockholm, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Anne Jensen ( this e-mail address is bad, please contact ).