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Capital Regulation and Tail Risk

Enrico Perotti (), Lev Ratnovski () and Razvan Vlahu ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.

Keywords: Banking; Capital regulation; Risk-taking; Tail risk; Systemic risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-reg and nep-upt
Date: 2011-08
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https://www.dnb.nl/en/binaries/working%20paper%20307_tcm47-256588.pdf (application/pdf)

Related works:
Journal Article: Capital Regulation and Tail Risk (2011) Downloads
Working Paper: Capital Regulation and Tail Risk (2011) Downloads
Working Paper: Capital Regulation and Tail Risk (2011) Downloads
Working Paper: Capital Regulation and Tail Risk (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:307

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