Banking-on-the-Average Rules

Hans Gersbach and Volker Hahn

No 7819, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we introduce a new requirement for bank capital: banking-on-the-average rules. Under these rules a bank?s required level of equity capital is monotonically increasing in the realized equity capital of its peers. In a simple model we illustrate the workings of banking-on-the-average rules. We show that in booms these rules can prevent banks from taking excessive risks. Moreover, they alleviate the socially harmful procyclicality of conventional equity-capital rules, which may induce banks to cut back excessively on lending. Finally, we argue that under these rules prudent banks can impose prudency on other banks. In addition, banking-on-the-average rules ensure the build-up of bank equity capital in booms and thus avoid excessive leverage.

Keywords: Banking crisis; Banking on the average; Banking system; Equity-capital requirements (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2010-05
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Citations: View citations in EconPapers (1)

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Working Paper: Banking-on-the-Average Rules (2009)
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