Research Papers in Economics, Department of Economics, Stockholm University
No 2012:3:
Banking on Regulations?
Bo Larsson ()
and Hans Wijkander ()
Abstract: The financial crisis that erupted 2007-2008 has reinforced
demand for regulation of banks. The Basle III accord which is to be
implemented January first 2013 encompasses two types of regulations with
the goal to enforce more prudence among banks. One is capital adequacy
regulation which stipulates a lowest ratio between bank capital and bank
assets. The other is constraints on dividends and bonuses payments. Banking
on these regulations to raise prudence regarding risk taking among banks
may lead to disappointment. Within a dynamic model of a value maximizing
bank we find that both regulations lower bank value, also in situations
where regulations do not bind. None of the regulations leads to increased
optimal ratio between common equity and lending. Capital adequacy
regulation reinforces credit squeeze when binding. More frequent dividend
payouts leads to higher equilibrium bank capital.
Keywords: Banking; Dynamic Banking; Banking regulation; Capital adequacy; Dividends; (follow links to similar papers)
JEL-Codes: C61; G21; G22; (follow links to similar papers)
34 pages, March 12, 2012
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