A Simple Model of Bank Behaviour—With Implications for Solvency Regulation

Peter Zweifel, Dieter Pfaff and Jochen Kühn

Studies in Microeconomics, 2015, vol. 3, issue 1, 49-68

Abstract: A simple model of bank behaviour is shown to have implications for solvency regulation of the Basel type. The investment division seeks to maximize RORAC , with higher solvency S lowering the cost of refinancing but tying costly capital. In period 1, exogenous changes in expected returns d μ ¯ and in volatility d σ ¯ occur, causing optimal adjustments dS */ d μ ¯ and dS */ d σ ¯ in period 2. In period 3, the actual adjustment dS * creates an endogenous trade-off with slope d μ ^ / d σ ^ . Basel- type regulation modifies this slope, inducing senior management to opt for a higher value of σ in several situations. Solvency regulation can thus run counter its stated objective.

Keywords: Regulation; banks; solvency; Basel I; Basel II; Basel III (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/2321022215577549 (text/html)

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:sae:miceco:v:3:y:2015:i:1:p:49-68

DOI: 10.1177/2321022215577549

Access Statistics for this article

More articles in Studies in Microeconomics
Bibliographic data for series maintained by SAGE Publications ().