Capital Levels and Risk-Taking Propensity in Financial Institutions

Giovanni Barone-Adesi, Walter Farkas and Pablo Koch-Medina
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Giovanni Barone-Adesi: University of Lugano; Swiss Finance Institute
Walter Farkas: University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zurich
Pablo Koch-Medina: University of Zurich - Department of Banking and Finance; Swiss Finance Institute

No 13-33, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Regulators dedicate much attention to the option that financial institutions in distress have to transfer losses to their creditors. It is generally recognized that the existence of this option provides intermediaries with a powerful incentive to keep firm capital close to the minimal requirement. We argue that undercapitalization however harms profitable growth opportunities. Our model quantifies the interaction of these incentives and derives implications for regulation.

Keywords: risk propensity; net tangible value; default option; franchise value (search for similar items in EconPapers)
JEL-codes: G18 G31 G32 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2013-06
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1333

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