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Bank regulation under nonbinding capital guidelines

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Abstract

A one-period model of bank equity is presented in which the end of the period can be interpreted as the next regulatory examination. A capital guideline is in place that may or may not be met as the values of the bank's assets and liabilities fluctuate during the period. If the guideline is not met at the time of examination, however, equityholders bear some cost. The bank's risk-taking incentives between examinations are studied. The model suggests that higher capital guidelines may cause riskier bank behavior at some points in time, but do not imply a trend toward a riskier banking system.

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Authors and Affiliations

  1. Department of Economics, Loyola University of Chicago, 820 North Michigan Avenue, 60611, Chicago, IL, USA

    Sarah B. Kendall

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  1. Sarah B. Kendall
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Kendall, S.B. Bank regulation under nonbinding capital guidelines. J Finan Serv Res 5, 275–286 (1992). https://doi.org/10.1007/BF00115322

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  • DOI: https://doi.org/10.1007/BF00115322

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