Prudent Banks and Creative Mimics: Can We Tell the Difference?

Andrew Powell, Marcus Miller and Antonia Maier

No 3958, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: The recent financial crisis has forced a rethink of banking regulation and supervision and the role of financial innovation. This paper develops 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 behavior ex ante then it is complementary to capital regulation. However, financial innovation may erode supervisors' ability to detect risk and capital levels should then be higher. Regulators, however, may not be aware their capacities have been undermined. The paper argues for a four-prong policy response with higher bank capital ratios, enhanced supervision, limits to the use of complex financial instruments and Coco's. The results may support the institutional arrangements proposed recently in the United Kingdom.

Keywords: Bank management; Financial institutions; Banking law; Bank Regulation; Financial Crises (search for similar items in EconPapers)
JEL-codes: D82 G21 G38 L51 (search for similar items in EconPapers)
Date: 2011-12
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://publications.iadb.org/publications/english ... l-the-Difference.pdf (application/pdf)

Related works:
Working Paper: Prudent Banks and Creative Mimics: Can we tell the difference? (2012)
Working Paper: Prudent Banks and Creative Mimics: Can We Tell the Difference? (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:3958

Access Statistics for this paper

More papers in IDB Publications (Working Papers) from Inter-American Development Bank Contact information at EDIRC.
Bibliographic data for series maintained by Felipe Herrera Library ().