Robust capital regulation

Viral Acharya, Hamid Mehran, Til Schuermann and Anjan Thakor ()

No 490, Staff Reports from Federal Reserve Bank of New York

Abstract: Banks? leverage choices represent a delicate balancing act. Credit discipline argues for more leverage, while balance-sheet opacity and ease of asset substitution argue for less. Meanwhile, regulatory safety nets promote ex post financial stability, but also create perverse incentives for banks to engage in correlated asset choices and to hold little equity capital. As a way to cope with these distorted incentives, we outline a two-tier capital framework for banks. The first tier is a regular core capital requirement that helps deter excessive risk-taking incentives. The second tier, a novel aspect of our framework, is a special capital account that limits risk taking but preserves creditors? monitoring incentives.

Keywords: Banks and banking - Regulations; Systemic risk; Bank capital; Credit; Bank assets (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-reg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Robust capital regulation (2012)
Working Paper: Robust Capital Regulation (2012)
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