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Working Paper
Regulating Bank Portfolio Choice Under Asymmetric Information
Regulating bank risk-taking is challenging since banks know more than regulators about the risks of their portfolios and can make adjustments to game regulations. To address this problem, I build a tractable model that incorporates this information asymmetry. The model is flexible enough to encompass many regulatory tools, although I focus on taxes. These taxes could also be interpreted as reflecting the shadow costs of other regulations, such as capital requirements. I show that linear risk-sensitive taxes should not generally be set more conservatively to address asymmetric information. I ...