Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?
In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also hav...
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Veröffentlicht in: | The American economic review 2000-03, Vol.90 (1), p.147-165 |
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Hauptverfasser: | , , |
Format: | Artikel |
Sprache: | eng |
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Zusammenfassung: | In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path. |
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ISSN: | 0002-8282 1944-7981 |
DOI: | 10.1257/aer.90.1.147 |