Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/23729
Authors: 
Dietrich, Diemo
Vollmer, Uwe
Year of Publication: 
2004
Series/Report no.: 
Diskussionspapiere / Institut fuer Wirtschaftsforschung Halle 192
Abstract: 
This paper provides an explanation for the observation that banks hold on average a capital ratio in excess of regulatory requirements. We use a functional approach to banking based on Diamond and Rajan (2001) to demonstrate that banks can use capital ratios as a strategic tool for renegotiating loans with borrowers. As capital ratios affect the ability of banks to collect loans in a nonmonotonic way, a bank may be forced to exceed capital requirements. Moreover, high capital ratios may also constrain the amount a banker can borrow from investors. Consequently, the size of the banking sector may shrink
Subjects: 
incomplete contracts
minimum capital requirements
bank capital
disintermediation
pro-cyclicality
JEL: 
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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