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Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking

Uwe Vollmer and Harald Wiese

Journal of Financial Stability, 2013, vol. 9, issue 4, 487-497

Abstract: This paper analyzes the incentive effects of special bank resolution schemes which were introduced during the recent financial crisis. These schemes allow regulators to take control over a systemically important financial institution before bankruptcy. We ask how special resolution schemes influence banks’ risk-taking and whether regulators should combine them with minimum capital requirements. We model a single bank which is supervised by a regulator who receives an imperfect signal about the bank's probability of success. We find that capital requirements are better than resolution from a welfare point of view if the quality of the signal is low, if it is difficult for the bank to attract deposits, or if the project return is low.

Keywords: Bank resolution; Capital requirements; Financial crisis (search for similar items in EconPapers)
JEL-codes: G21 G28 G33 (search for similar items in EconPapers)
Date: 2013
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