Optimal capital requirements with noisy signals on banking risk

Kai Ding (), Enoch Hill and David Perez-Reyna
Additional contact information
Kai Ding: California State University, East Bay

Economic Theory, 2021, vol. 71, issue 4, No 12, 1649-1687

Abstract: Abstract We analyze the optimal capital requirement in a model of banks with heterogeneous investment risks and asymmetric information. Asymmetric information prevents depositors from charging an actuarially fair interest rate and leads to cross-subsidization across banks. A leverage constraint reduces the investment of riskier banks, mitigating the pecuniary externality on deposit rates. When policymakers lack information about banking risk, the optimal leverage constraint is tighter than the first-best leverage ratio. When policymakers observe a noisy signal of banking risk, the optimal signal-based leverage constraint is tighter when the signal has worse precision, rather than a larger level of expected risk.

Keywords: Capital requirements; Banking regulation; Asymmetric information (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00199-020-01310-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: Optimal Capital Requirement with Noisy Signals on Banking Risk (2018)
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:spr:joecth:v:71:y:2021:i:4:d:10.1007_s00199-020-01310-z

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-020-01310-z

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().