Ex Ante versus Ex Post Regulation of Bank Capital

Arup Daripa () and Simone Varotto ()

No icma-dp2004-12, ICMA Centre Discussion Papers in Finance from Henley Business School, Reading University

Abstract: The current debate on the new Basel Accord gives rise to a natural question about the appropriate form of capital regulation. We construct a general framework to study this issue. We show that ex ante regulation wastes the expertise of a bank in measuring its risk exposure, while an ex post regime makes full use of it. However, the latter is more vulnerable to the problem of unknown managerial risk preference. The results imply that the two regimes are complements, rather than substitutes. Further, under plausible conditions, an ex post regime emerges as the dominant element of the optimal combination. We use the results to shed light on current policy concerns.

Keywords: Ex Ante Regulation; Ex Post Regulation; Asymmetric Information; Safety Loss; Overportection; Loss; Safety Bias; Basel II (search for similar items in EconPapers)
JEL-codes: G28 D82 (search for similar items in EconPapers)
Date: 2004-06

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Related works:
Working Paper: Ex Ante Versus Ex Post Regulation of Bank Capital (2005)
Working Paper: Ex Ante Versus Ex Post Regulation of Bank Capital (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2004-12

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