Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89032
Authors: 
Powell, Andrew
Miller, Marcus
Maier, Antonia
Year of Publication: 
2011
Series/Report no.: 
IDB Working Paper Series IDB-WP-284
Abstract: 
The recent financial crisis has forced a rethink of banking regulation and supervision and the role of financial innovation. This paper develops a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium, but deposit insurance will tend to increase the level of capital required. If supervision detects risky behavior ex ante then it is complementary to capital regulation. However, financial innovation may erode supervisors’ ability to detect risk and capital levels should then be higher. Regulators, however, may not be aware their capacities have been undermined. The paper argues for a four-prong policy response with higher bank capital ratios, enhanced supervision, limits to the use of complex financial instruments and Coco’s. The results may support the institutional arrangements proposed recently in the United Kingdom.
JEL: 
D82
G21
G38
L51
Document Type: 
Working Paper

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