Capital Regulation and Tail Risk [electronic resource] / Enrico Camillo Perotti.
Material type:
TextSeries: IMF Working Papers; Working Paper ; No. 11/188Publication details: Washington, D.C. : International Monetary Fund, 2011Description: 1 online resource (38 p.)ISBN: 1462308260 :ISSN: 1018-5941Subject(s): Banker | Banking | Capital Ratio | Criteria for Decision-Making Under Risk and Uncertainty | Financial Innovation | Financial Institutions and Services: Government Policy and Regulation | United StatesAdditional physical formats: Print Version:: Capital Regulation and Tail RiskOnline resources: IMF e-Library | IMF Book Store Abstract: The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high 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.
The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high 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.
Description based on print version record.
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