Optimal Bank Capital Requirements: An Asymmetric Information Perspective
Simone Berardi and
Alessandra Marcelletti ()
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Simone Berardi: LUISS School of European Political Economy, Postal: Via di Villa Emiliani, 14, 00197 Rome, Italy
Alessandra Marcelletti: LUISS School of European Political Economy, Postal: Via di Villa Emiliani, 14, 00197 Rome, Italy
No 2017/2, SEP Working Papers from LUISS School of European Political Economy
The issue on the amount of capital banks should hold has pushed back the debate on top of policymakers' agenda. Literature on this field mainly focuses on how to prevent banks from gaming risk-weighted capital requirements. The analysis has provided different types of solutions, such as the introduction of penalties and complementary use of risk-sensitive capital requirements and leverage ratio. Although the majority of theoretical papers rely on an asymmetric information framework, only one source of asymmetry is taken into account. The paper fills this gap by studying how to implement a socially optimal regulation scheme that simultaneously faces moral hazard and adverse selection problems. Including both sources of asymmetry is crucial because of the supervisor's inability to distinguish between risk profiles and misconduct (risk-shifting behavior) of banks.
Keywords: bank capital requirements; bank regulation; moral hazard; adverse selection (search for similar items in EconPapers)
JEL-codes: D81 G21 G28 (search for similar items in EconPapers)
Pages: 20 pages
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:sepewp:2017_002
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