scholarly journals Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy

2009 ◽  
Author(s):  
Simon Dubecq ◽  
Benoit Mojon ◽  
Xavier Ragot
Keyword(s):  
Monetary Policy ◽  
Risk Taking ◽  
Capital Requirements ◽  
Risk Shifting

Accounting Information Quality, Interbank Competition, and Bank Risk-Taking

2014 ◽  
Vol 90 (3) ◽  
pp. 967-985 ◽  
Author(s):  
Carlos Corona ◽  
Lin Nan ◽  
Gaoqing Zhang
Keyword(s):  
False Alarm ◽  
Risk Taking ◽  
Information Quality ◽  
Accounting Information ◽  
Capital Requirements ◽  
Quality Of Accounting Information ◽  
Accounting Information Quality ◽  
Fierce Competition ◽  
Excessive Risk Taking

ABSTRACT We study the interaction between interbank competition and accounting information quality and their effects on banks' risk-taking behavior. We identify an endogenous false-alarm cost that banks incur when forced to sell assets to meet capital requirements. We find that when the interbank competition is less intense, an improvement in the quality of accounting information encourages banks to take more risk. Keeping the banks' investments in loans constant, the provision of high-quality accounting information reduces the false-alarm cost of assets sales and improves the discriminating efficiency of the capital requirement policy. When considering the banks' endogenous investment decisions, however, this improvement in discriminating efficiency causes excessive risk-taking, because banks respond by competing more aggressively in the deposit market, and the increase in deposit costs motivates banks to take more risk. Our paper shows that improving information quality increases risk-taking with mild competition, but has no effect under fierce competition.

scholarly journals Capital requirements, risk-taking and welfare in a growing economy

2021 ◽  
Author(s):  
Pierre-Richard Agénor ◽  
Luiz A. Pereira da Silva
Keyword(s):  
Risk Taking ◽  
Default Risk ◽  
Limited Liability ◽  
Capital Requirements ◽  
Optimal Choice ◽  
Capital Adequacy ◽  
Financial Supervision ◽  
Capital Adequacy Ratio ◽  
Monitoring Effort ◽  
Growing Economy

AbstractThe effects of capital requirements on risk-taking and welfare are studied in an overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky, more productive but socially inefficient, technology. Bank risk-taking is endogenous. As a result of a skin in the game effect—motivated either as an aggregate externality, or as the outcome of the optimal choice of monitoring effort by individual banks—default risk is inversely related to the capital adequacy ratio. Numerical simulations show that in an equilibrium where banks extend both safe and risky loans, the skin in the game effect must be sufficiently strong for a welfare-maximizing regulatory policy to exist. These results remain qualitatively similar with endogenous monitoring costs and a strong effect of monitoring on entrepreneurial moral hazard. However, numerical experiments also suggest that the optimal capital adequacy ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.

Shareholder risk-taking incentives in the presence of contingent capital

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mahmoud Fatouh ◽  
Ayowande A. McCunn
Keyword(s):  
Risk Taking ◽  
Banking System ◽  
Capital Requirements ◽  
Content Type ◽  
Basic Model ◽  
Conversion Rates ◽  
A Minor ◽  
The Impact ◽  
Practical Implications

Purpose This paper aims to present a model of shareholders’ willingness to exert effort to reduce the likelihood of bank distress and the implications of the presence of contingent convertible (CoCo) bonds in the liabilities structure of a bank. Design/methodology/approach This study presents a basic model about the moral hazard surrounding shareholders willingness to exert effort that increases the likelihood of a bank’s success. This study uses a one-shot game and so do not capture the effects of repeated interactions. Findings Consistent with the existing literature, this study shows that the direction of the wealth transfer at the conversion of CoCo bonds determines their impact on shareholder risk-taking incentives. This study also finds that “anytime” CoCos (CoCo bonds trigger-able anytime at the discretion of managers) have a minor advantage over regular CoCo bonds, and that quality of capital requirements can reduce the risk-taking incentives of shareholders. Practical implications This study argues that shareholders can also use manager-specific CoCo bonds to reduce the riskiness of the bank activities. The issuance of such bonds can increase the resilience of individual banks and the whole banking system. Regulators can use restrictions on conversion rates and/or requirements on the quality of capital to address the impact of CoCo bonds issuance on risk-taking incentives. Originality/value To model the risk-taking incentives, authors generally modify the asset processes to introduce components that reflect asymmetric information between CoCo holders and shareholders and/or managers. This paper follows a simpler method similar to that of Holmström and Tirole (1998).

Monetary Policy, Bank Regulation and Risk-Taking

2017 ◽  
Author(s):  
Gabriel Amobila Aboyadana ◽  
Lucy Boachie-Mensah Aboyadana
Keyword(s):  
Monetary Policy ◽  
Risk Taking ◽  
Bank Regulation ◽  
Policy Bank
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