Prudential Regulation and Capital Injection under Moral Hazard in Banks and Entrepreneurs

Hiroshi Osano

No 576, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper develops a model that considers the entrepreneur's moral hazard in the choice of project, the bank's moral hazard in the choice of bank loan contracting and refinancing, and the prudential regulation of the bank. The main findings are as follows: (i)Increasing capital requirements increases the probability of the safe project relative to that of the risky project, and increases (decreases) the probability of the risky project with refinancing relative to that of the risky project with liquidation if the refinancing requirement effect dominates the interest premium effect (if the interest premium effect dominates the refinancing requirement effect and the amount of capital injection is relatively small). (ii)Increasing repayments to the regulator increases the probability of the safe project and the probability of the risky project with liquidation relative to that of the risky project with refinanicng. (iii)Increasing the amount of capital injection decreases (increases) the probability of the safe project and the probability of the risky project with liquidation relative to that of the risky project with refinancing for a small (large) amount of capital injection.

Keywords: Prudential regulation; capital requirement; bank recapitalization; bank capital. (search for similar items in EconPapers)
JEL-codes: D82 G21 G28 L51 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2003-10
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:kyo:wpaper:576

Access Statistics for this paper

More papers in KIER Working Papers from Kyoto University, Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Makoto Watanabe ().