Working Paper: CEPR ID: DP2597
Authors: Sudipto Bhattacharya; Manfred Planck; Günter Strobl; Josef Zechner
Abstract: We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the bank's asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholders/managers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the bank, and of the auditing frequency are examined.
Keywords: bank capital regulation; closure rules; Poisson audits; bankers' rents; risk-shifting incentives
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory closure rules (G18) | risk-taking behavior of bank equityholders (G21) |
| Auditing frequency (M42) | bank's risk profile (G21) |
| Tax or subsidies on deposit interest payments (H23) | regulatory outcomes (K20) |
| Auditing frequency (M42) | risk-taking incentives of bank shareholders/managers (G21) |