Capital Regulation and Tail Risk

Enrico Perotti, Lev Ratnovski () and Razvan Vlahu

No 2011/188, 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: WP; capital ratio; project choice; recapitalization decision; bank capital; Capital Regulation; Tail Risk; Risk Management; Financial Innovation; adjustment cost; recapitalization cost; adjustment effect; capital requirement; risk profile; Capital adequacy requirements; Countercyclical capital buffers; Bank regulation (search for similar items in EconPapers)
Pages: 38
Date: 2011-08-01
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Citations: View citations in EconPapers (39)

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Related works:
Journal Article: Capital Regulation and Tail Risk (2011)
Working Paper: Capital Regulation and Tail Risk (2011)
Working Paper: Capital Regulation and Tail Risk (2011)
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