Daripa, Arup and Varotto, S. (2005) Ex ante versus ex post regulation of bank capital. Working Paper. Birkbeck, University of London, London, UK.
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Abstract
The current debate on the new Basel Accord gives rise to a natural question about the appropriate form of capital regulation. We construct a simple framework to analyze this ssue. In our model the risk carried by a bank as well as managerial risk preference are a bank’s private information. We show that ex ante constraints waste the superior risk information of a bank, while an ex post regime makes full use of it. However, the latter is more vulnerable to the problem of unknown managerial risk-aversion. The results imply that the two regimes are complements, rather than substitutes. Further, under plausible conditions, an ex post regime emerges as the dominant element of the optimal combination. We use the results to shed light on current policy concerns. In particular, our results provides theoretical underpinning for the inclusion of pillar 2 alongside pillar 1 in Basel II.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Additional Information: | BWPEF 0518 |
| Keyword(s) / Subject(s): | Ex Ante Regulation, Ex Post Regulation, Asymmetric Information, Safety Loss, Overprotection Loss, Safety Bias, Basel II |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 29 Mar 2019 13:53 |
| Last Modified: | 02 Aug 2023 17:50 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/26972 |
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