This article examines the role of capital in financial institutions -why it is important, how market-generated capital 'requirements' differ from regulatory requirements, and the form that regulatory requirements should take. Along the way, we examine historical trends in bank capital, problems in measuring capital, and some possible unintended consequences of capital requirements. Within this ...

We develop an overlapping generations model with re-tradeable paper assets and capital accumulation to analyze the interaction between the real economy and an international asset market. The world consists of two homogeneous countries, which differ only in their initial levels of capital. Consumers who live for two periods transfer wealth over time and across countries by holding international ...

The change in the business model of venture capitalists from investing locally towards investing across borders started to intensify in the late 1990s. According to a dataset of European and NorthAmerican countries, we find that countries with higher expected growth and higher lagged stock market returns receive larger net cross-border venture capital inflows. Thus, portfolio companies located ...

In this paper, we discuss the paradigm shift in bank capital from the “gone concern” to the “going concern” mindset. We then propose a methodology for pricing a product of this shift called Contingent Capital Notes (“CoCos”). The Merton Model can determine a price for credit risk by using the firm’s equity value as a call option on those assets. Our pricing methodology for CoCos also uses the c...

This paper extends Lucas (1978) to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an “option”. When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin’s Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. B...

When approaching electronic capital market design and microstructure with the focus of analysing and improving existing markets with end-state analysis, it is necessary to name an ideal objective. This serves the purposes of technology evaluation and the development of a standard framework for structural measurement in modeling and language paradigm design. An ideal capital market architecture ...

We investigate the effects of interregional labor market integration on the dynamic interaction between migration and capital formation through changes in house prices. The nature of this interaction depends on initial conditions at the time of labor market integration. In an initially capital-poor economy, there may be a reversal of migration during the transition to the steady state, like obs...

This paper recognizes two main factors that cause the capital requirement to affect the weighted average cost of capital and hence the investment behavior ofbanks: underpriced debt resulting from the deposit insurance and information asymmetry between managers and the stock market. For a bank enjoying a low cost of debt (deposits), an increased proportion of equity financing raises the weighted...

We introduce intermediation frictions into a Lucas (1978) asset pricing model in order to study the effects of low capital in the intermediary sector on asset prices. Our model shows that low intermediary capital can increase risk premia, Sharpe ratios, volatility and comovement among intermediated assets. Reductions in intermediary capital also lead to a flight-to-quality in which intermediari...