Abstract
This paper examines theoretically the effects of more stringent capital regulation on bank asset portfolio risk. The analysis shows that, for a value-maximizing bank, incentives to increase asset risk decline as its capital increases. Thus, as long as regulatory efforts to contain asset risk and size are not reduced, more stringent capital regulation unambiguously reduces the expected liability of the deposit insurance system.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have