Abstract: In this paper, we model the dynamic portfolio choice problem
facing banks, calibrate the model using empirical data from
the banking industry for 1984-1993, and assess quantitatively
the impact of recent regulatory developments related to bank
capital. The model suggests that two aspects of the new regulatory
environment may have unintended effects: higher capital requirements
may lead to increased portfolio risk, and capital-based premia
do not deter risk-taking by well-capitalized banks. On the other
hand, risk-based capital standards may have favorable effects
provided the requirements are stringent enough.
Full paper (131 KB PDF)
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