Year: 2024
Type: article
Abstract: We investigate whether a carrot approach, which provides benefits for regulatory compliance rather than penalties for noncompliance, incentivizes banks to reach capital levels above the minimum requirements. We document a significant discontinuity at the 10% regulatory capital threshold, where banks receive benefits for exceeding it. Banks exceed it to pay lower deposit insurance fees, access brokered deposits, and expanded financial activities. Banks often rely on equity to reach this threshold while using accounting discretion primarily when facing small capital shortfalls. Our findings suggest the carrot approach can effectively increase banks' capital positions. However, we find that using accounting discretion to exceed the threshold hurts bank stability.
DOI: 10.1111/jmcb.13230
Authors: LUCIANA OROZCO, SILVINA RUBIO
Institutions: University of St Andrews, University of Cyprus
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,620
OpenAlex ID: W4404891817