Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244700 
Year of Publication: 
2021
Series/Report no.: 
LawFin Working Paper No. 20
Publisher: 
Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin), Frankfurt a. M.
Abstract: 
Using loan-level data from Germany, we investigate how the introduction of model-based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks 'optimized' model-based regulation to lower their capital requirements. Banks systematically underreported risk, with under reporting being more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.
Subjects: 
capital regulation
internal ratings
complexity of regulation
Basel regulation
JEL: 
G01
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.