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Capital Regulation and Tail Risk

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

No 11/188, IMF Working Papers from International Monetary Fund

Abstract: The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high 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: Capital regulation; Risk management; Tail Risk, Financial Innovation, banker, recapitalization, banking, capital ratio, Criteria for Decision-Making under Risk and Uncertainty, Financial Institutions and Services: Government Policy and Regulation, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-reg, nep-rmg and nep-upt
Date: 2011-08-01
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Journal Article: Capital Regulation and Tail Risk (2011) Downloads
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Working Paper: Capital Regulation and Tail Risk (2011) Downloads
Working Paper: Capital Regulation and Tail Risk (2011) Downloads
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