Working Paper
The impact of capital-based regulation on bank risk-taking: a dynamic model
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.
Keywords: Bank capital; Risk;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 1996
Number: 96-12