Capital Regulation and Tail Risk
Copyright policy )Capital Regulation and Tail Risk
The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.
- Universiteit van Amsterdam
- University of Amsterdam Netherlands
- European Central Bank Germany
- De Nederlandsche Bank Netherlands
- Economic Policy Institute United States
Systemic Risk, 330, Bank Regulation, Risk Shifting, Capital Requirements, Tail Risk, Systemic Risk, Bankrisiko, Banking; Capital regulation; Risk-taking; Tail risk; Systemic risk, Basler Akkord, Bankenliquidität, G3, G2, E6, Capital Requirements, Bankenregulierung, ddc:330, Government Policy and Regulation, [Capital regulation;Risk management;Tail Risk, Financial Innovation, banker, recapitalization, banking, capital ratio, Criteria for Decision-Making under Risk and Uncertainty, Financial Institutions and Services], Tail Risk, O16, F4, Risk Shifting, F3, Bank Regulation, Banking; Risk; Risk-taking; Systemic risk; Tail risk [Capital regulation; Keywords], jel: jel:G21, jel: jel:G28, jel: jel:G2, jel: jel:G3, jel: jel:E6, jel: jel:F3, jel: jel:F4, jel: jel:O16
Systemic Risk, 330, Bank Regulation, Risk Shifting, Capital Requirements, Tail Risk, Systemic Risk, Bankrisiko, Banking; Capital regulation; Risk-taking; Tail risk; Systemic risk, Basler Akkord, Bankenliquidität, G3, G2, E6, Capital Requirements, Bankenregulierung, ddc:330, Government Policy and Regulation, [Capital regulation;Risk management;Tail Risk, Financial Innovation, banker, recapitalization, banking, capital ratio, Criteria for Decision-Making under Risk and Uncertainty, Financial Institutions and Services], Tail Risk, O16, F4, Risk Shifting, F3, Bank Regulation, Banking; Risk; Risk-taking; Systemic risk; Tail risk [Capital regulation; Keywords], jel: jel:G21, jel: jel:G28, jel: jel:G2, jel: jel:G3, jel: jel:E6, jel: jel:F3, jel: jel:F4, jel: jel:O16
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