Capital Regulation and Tail Risk

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.
Publication date: August 2011
ISBN: 9781462308262
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , banker , capital regulation , recapitalization , banking , capital ratio , capital adjustment , bank capital , bank risk , bank risk-taking , capital requirement , capital adequacy , bank regulation , banking system , bank behavior , banking supervision , deposit insurance , bank charte

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