European Parliament Library

Capital Regulation and Tail Risk, Enrico Camillo Perotti, Lev Ratnovski, Razvan Vlahu

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
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. The Model; 1. The Timeline; 2. The Two Opposite Effects of Capital on Bank Risk-taking; III. "Skin in the Game" and Tail Risk; A. Payoff and Project Choice; B. Comparative Statics; C. Economic Significance: A Quantitative Example; 3. Tail Risk and the Initial Capital Required to Prevent Risk-shifting; IV. Tail Risk and the Unintended Effects of Higher Capital; A. Payoffs and the Recapitalization Decision; 4. Bank's Recapitalization Decision and Payoffs; B. Project Choice; 5. Bank's Project Choice; C. Comparative Statics
Language
eng
Literary Form
non fiction
Note
Description based upon print version of record
Physical Description
1 online resource (64 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9780146390067

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