Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53777
Authors: 
Caldwell, Greg
Year of Publication: 
2007
Series/Report no.: 
Bank of Canada Working Paper 2007,9
Abstract: 
The author develops a dynamic model of banking competition to determine which capital instrument is most effective in disciplining banks' risk choice. Comparisons are conducted between equity, subordinated debentures (SD), and uninsured deposits (UD) as funding sources. The model, adapted from Repullo (2004), analyzes the effectiveness of regulatory capital when banks incorporate charter value and competition for depositors into their risk-taking decision. The paper's main finding is that although all three instruments can induce market discipline on banks, equity weakly dominates SD and UD (with SD weakly dominating UD).
Subjects: 
Financial institutions
JEL: 
G21
G28
Document Type: 
Working Paper
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