Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87067
Authors: 
Perotti, Enrico
Ratnovski, Lev
Vlahu, Razvan
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper 11-039/2/DSF14
Abstract: 
The paper studies risk mitigation associated with capital regulation, in a context when banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. When capital raising is costly, poorly capitalized banks may limit risk to avoid breaching the minimal capital ratio. A bank with higher capital has lesschance of breaching the ratio, so may actually take more risk. As a result, banks which have access to tail risk projects may take greater risk when highly capitalized.The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.
Subjects: 
Bank Regulation
Risk Shifting
Capital Requirements
Tail Risk
Systemic Risk
JEL: 
E6
F3
F4
G2
G3
O16
Document Type: 
Working Paper

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