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156
The Impact Of Capital-Based Regulation On Bank Risk-Taking: A Dynamic Model
, 1996
"... Abstract In recent years, new and more stringent federal requlations governing bank capital have been adopted, including insurance premia linked to banks' capital-to-asset ratios and capital requirements linked to asset portfolio risk. In this paper, we model the dynamic portfolio choice probl ..."
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Cited by 85 (3 self)
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Abstract In recent years, new and more stringent federal requlations governing bank capital have been adopted, including insurance premia linked to banks' capital-to-asset ratios and capital requirements linked to asset portfolio risk. In this paper, we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 19841993, and assess quantitatively the impact of the new regulations. The model suggests that two aspects of the new regulatory environment may have unintended effects: higher capital requirements may lead to increased portfolio risk, and capitalbased premia do not deter risk-taking by well-capitalized banks and tend to promote risk-taking among undercapitalized banks. On the other hand, risk-based capital standards may have favorable effects provided the requirements are stringent enough. ///// Bank/capital/shields/the/deposit/insurance/fund/from/liability/by/absorbing 1 bank/losses/and/preventing/bank/ins...
Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive,” working paper
, 2010
"... We examine the pervasive view that “equity is expensive, ” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity co ..."
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Cited by 85 (7 self)
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We examine the pervasive view that “equity is expensive, ” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. Any desirable public subsidies to banks ’ activities should be given directly and not in ways that encourage leverage. And while debt’s informational insensitivity may provide valuable liquidity, increased capital (and reduced leverage) can enhance this benefit. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support. We conclude that bank equity is not socially expensive, and that high leverage is not necessary for banks to perform all their socially valuable functions, including lending, deposittaking and issuing money-like securities. To the contrary, better capitalized banks suffer fewer
A macroprudential approach to financial regulation.
- Journal of Economic Perspectives
, 2011
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The crisis of fair-value accounting: Making sense of the recent debate, in: Accounting,
- Organizations and Society
, 2009
"... a r t i c l e i n f o a b s t r a c t The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters' push to extend FVA into other areas. In this article, we hig ..."
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Cited by 57 (1 self)
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a r t i c l e i n f o a b s t r a c t The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters' push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or US GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Fourth, although it is difficult to fault the FVA standards per se, implementation issues are a potential concern, especially with respect to litigation. Finally, we identify several avenues for future research.
Loan Loss Provisioning and Economic Slowdowns: Too Much, Too Late?
- Journal of Financial Intermediation
, 2003
"... Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall minimum capital regulatory framework. Several national regulators have adopted or are planning to introduce a cyclically adjustable requirem ..."
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Cited by 54 (4 self)
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Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall minimum capital regulatory framework. Several national regulators have adopted or are planning to introduce a cyclically adjustable requirement for loan loss provisions and the Basel Committee on Banking Supervision is considering how to provide adequate treatment to provisioning practices within a broad bank capital regulatory framework. This paper contributes to the ongoing debate by exploring the available evidence about bank provisioning practices around the world. We find that in the vast majority of cases banks tend to delay provisioning for bad loans until too late, when cyclical downturns have already set in, possibly magnifying the impact of the economic cycle on banks' income and capital. Notwithstanding a considerable difference in patterns followed by banks around the world we find that size and timing of provisions tend to improve with the level of economic development.
An analysis of the impact of "substantially heightened" capital requirements on large institutions
, 2010
"... We examine the impact of “substantially heightened” capital requirements on large financial institutions, and on their customers. Our analysis yields three main conclusions. First, the frictions associated with raising new external equity finance are likely to be greater than the ongoing costs of ..."
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Cited by 54 (1 self)
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We examine the impact of “substantially heightened” capital requirements on large financial institutions, and on their customers. Our analysis yields three main conclusions. First, the frictions associated with raising new external equity finance are likely to be greater than the ongoing costs of holding equity on the balance sheet, implying that the new requirements should be phased in gradually. Second, the long-run steady-state impact on loan rates is likely to be modest, in the range of 25 to 45 basis points for a ten percentage-point increase in the capital requirement. Third, due to the unique nature of competition in financial services, even these modest effects raise significant concerns about migration of credit-creation activity to the shadow-banking sector, and the potential for increased fragility of the overall financial system that this might bring. Thus to avoid tilting the playing field in such a way as to generate a variety of damaging unintended consequences, increased regulation of the shadow-banking sector should be seen as an important complement to the reforms that are contemplated for banks and other large financial institutions.
Credit market competition and capital regulation
, 2005
"... Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks ha ..."
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Cited by 33 (0 self)
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Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending, thus creating an asset market-based incentive for banks to hold capital. Borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans, which accrue only if the loans are in fact paid off. Since borrowers do not fully internalize the cost of raising capital to the banks, the level of capital demanded by market participants may be above the one chosen by a regulator, even when capital is a relatively costly source of funds. This implies that capital requirements may not be binding, as recent evidence seems to indicate. ∗We would like to thank Martin Hellwig, Moshe Kim and Steven Ongena for useful comments, as well as
MERGERS AND ACQUISITIONS AND BANK PERFORMANCE IN EUROPE -- THE ROLE OF STRATEGIC SIMILARITIES
, 2004
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Examining the relationships between capital, risk and efficiency in European banking’,
- European, Financial Management,
, 2007
"... Abstract This paper analyses the relationship between capital, risk and efficiency for ..."
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Cited by 23 (3 self)
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Abstract This paper analyses the relationship between capital, risk and efficiency for
