Prudent Banks and Creative Mimics: Can we tell the difference?

Andrew Powell, Antonia Maier and Marcus Miller
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Andrew Powell: Inter American Development Bank
Antonia Maier: University of Warwick

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

Abstract: The recent financial crisis has forced a rethink of banking regulation and supervision and the role of nancial innovation. We develop a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium but deposit insurance will tend to increase the level of capital required. If supervision detects risky behaviour ex ante then it is complementary to capital regulation. However, nancial innovation may erode supervisors' ability to detect risk and capital levels should then be higher. But regulators may not be aware their capacities have been undermined. We argue for a four-prong policy response with higher bank capital ratios, enhanced supervision, limits to the use of complex financial instruments and Coco's. Our results may support the institutional arrangements proposed recently in the UK.

Keywords: Bank Regulation; Financial Crises; Information; Signaling. (search for similar items in EconPapers)
Date: 2012
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http://www2.warwick.ac.uk/fac/soc/economics/resear ... s/76.2012_miller.pdf

Related works:
Working Paper: Prudent Banks and Creative Mimics: Can We Tell the Difference? (2011)
Working Paper: Prudent Banks and Creative Mimics: Can We Tell the Difference? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cge:wacage:76

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