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The Impact of Capital-Based Regulation on Bank Risk-Taking: A Dynamic Model

Year: 1996

Type: article

Abstract: In this paper, we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. 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 capital-based premia do not deter risk-taking by well-capitalized banks. On the other hand, risk-based capital standards may have favorable effects provided the requirements are stringent enough.

Source: Finance and Economics Discussion Series

DOI: 10.17016/feds.1996.12

Authors: Paul S. Calem, Rafael Rob

Institutions: Federal Reserve, Federal Reserve Board of Governors, Federal Reserve Bank of Philadelphia, University of Pennsylvania

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

OpenAlex ID: W1541486432

FWCI: 1.596

Cites: 19

Cited by: 69

Related to: 10