EconPapers    
Economics at your fingertips  
 

A Theory of Precautionary Regulatory Capital in Banking

Phong Ngo

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: The orthodox assumption in the banking literature is that capital requirements are a binding constraint on banking behaviour. This is in conflict with the empirical observation that banks hold a bu¤er of capital well in excess of the minimum requirements. This paper develops a model where capital is endogenously determined within a profit maximising equilibrium. Optimality involves balancing the reduction in expected costs associated with regulatory breach with the excess cost of financing from increasing capital. We demonstrate that when the equilibrium probability of regulatory breach is less than one half, banks are expected to hold precautionary capital.

Pages: 37 pages
Date: 2006-05
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.cbe.anu.edu.au/researchpapers/econ/wp465.pdf (application/pdf)

Related works:
Journal Article: A Theory of Precautionary Regulatory Capital in Banking* (2006) Downloads
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:acb:cbeeco:2006-465

Access Statistics for this paper

More papers in ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-04-02
Handle: RePEc:acb:cbeeco:2006-465