How Does the Stock Market View Bank Regulatory Capital Forbearance Policies?

Van Son Lai and Xiaoxia Ye

No 2019-012, Working Papers from Department of Research, Ipag Business School

Abstract: During the subprime crisis, the FDIC has shown, once again, laxity in resolving and closing insolvent institutions. Ronn and Verma (1986) call the tolerance level below which a bank closure is triggered the regulatory policy parameter. We derive a model in which we make this parameter stochastic and bank-specific to infer the stock market view of the regulatory capital forbearance value. For 565 U.S. listed banks during 1990 to 2012, the countercyclical forbearance fraction in capital, most substantial in recessions, could represent 17%, on average, of the market valuation of bank equity and could go as high as 100%

Keywords: Bank regulatory closure rules or policy parameter; bank insolvency; regulatory forbearance; market-based closure rules; financial crises (search for similar items in EconPapers)
JEL-codes: G17 G21 G28 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2019-01-01
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Journal Article: How Does the Stock Market View Bank Regulatory Capital Forbearance Policies? (2020)
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