The Basel committee proposes making regulatory capital requirements more risk sensitive. Cost-benefit assessment suggests that this yields greater efficiency in the use of regulatory capital, but has substantial enforcement and compliance costs and may well increase the severity of banking crises. Better if the new accord sets risk-insensitive regulatory minimum capital standards and encourages...

Bank capital regulation seems to be today’s most accepted regulatory instrument. The reasoning is that limited liability and deposit insurance appear to give banks incentives for excessive risktaking. Capital requirements can alleviate this problem as banks are obliged to hold more capital which forces them to have more of their own funds at risk. But the theoretical literature has much more to...

This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks’ risk choice, even though all agents are risk neutral and there are no deadweight costs of bank failure, because high risk adversely affects...

INTRODUCTION Capital assets are used by the company in the physical process of producing goods and services and are ordinarily used for a number of years. The amounts involved are so large that businesses need to plan and evaluate expenditures for capital assets with care. The plan for expenditures is called a capital budget. The process of determining both how much to spend on a capital assets...

This paper examines the optimal design of capital and liquidity regulations under fire sale externalities. The lack of complementary liquidity ratio requirements harms the purpose of capital adequacy requirements by yielding not only inefficiently low risky investment but also more severe financial crises. When capital is regulated but liquidity is not, banks still keep liquid assets for micro-...

We propose two models to analyze welfare-maximizing capital requirements for insurance companies considering that capital is costly and therefore affecting the premium. Within a continuous-time model, we derive insurance demand and welfare as a function of personal wealth, the insurance company’s wealth, and the claims process, and compare them to their counterparts in a static model. Besides d...

T he pre-commitment approach to bank capital regulation is a radical departure from existing bank regulatory methods. First proposed in Kupiec and O’Brien (1995c), the approach advocates letting banks choose their capital levels and fining them if losses exceed this level. The essence of the proposal is to use fines (or other penalties) to encourage risky banks to hold more capital than safer o...