Year: 2020
Type: article
Abstract: ABSTRACT Government guarantees generate an implicit subsidy for banks. A capital requirement reduces this subsidy, through a simple liability composition effect. However, the guarantees also make a bank undervalue loans that generates surplus in states of the world in which it defaults. Raising the capital requirement makes the bank safer, which alleviates this problem. We refer to this mechanism, which we argue is empirically relevant, as the forced safety effect.
Source: The Journal of Finance
DOI: 10.1111/jofi.12958
Authors: SALEEM BAHAJ, FREDERIC MALHERBE
Institutions: Bank of England, University College London
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3040955805