Why High Leverage is Optimal for Banks
Liquidity production is a central role of banks. We show that, under idealized conditions, high leverage is optimal for banks when there is a market premium for (socially valuable) liquid [...]
The impact of imposing capital requirements on systemic risk
This paper examines the impact of imposing capital requirements on systemic risk. We use a static model on financial institutions’ risk-taking behavior to quantify the systemic risk in the cross-sectional [...]
Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking
This paper analyzes the incentive effects of special bank resolution schemes which were introduced during the recent financial crisis. These schemes allow regulators to take control over a systemically important [...]
Financial liberalization and bank risk-taking: International evidence
Our results indicate that financial liberalization increases bank risk-taking in both developed and developing countries but through different channels. Financial liberalization promotes stronger bank competition that increases risk-taking incentives in [...]
Toward a Run-Free Financial System
The financial crisis was a systemic run. Hence, the central regulatory response should be to eliminate run-prone securities from the financial system. By contrast, current regulation guarantees run-prone bank liabilities [...]
A Theory of Risk Capital
We present a theory of risk capital and of how tax and other costs of risk capital should be allocated in a financial firm. Risk capital is equity investment that [...]
Risk shifting in the US banking system: An empirical analysis
This paper contributes to the empirical literature on risk shifting. It proposes a method to find out whether risk shifting is present in the banking industry and, if so, what [...]
The Limits of Model-Based Regulation
In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial [...]
How Do Bank Regulators Determine Capital Adequacy Requirements?
Minimum capital regulations play a central role in banking regulation. Regulators require banks to maintain capital above a certain level in order to correct incentives to make excessively risky loans [...]
Math Gone Mad: Regulatory Risk Modeling by the Federal Reserve
The principal purpose of these models is to determine banks’ regulatory capital requirements—the capital “buffers” to be set aside so banks can withstand adverse events and remain solvent.Risk models are [...]