Abstract

http://ssrn.com/abstract=2317043
 
 

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Market-Based Bank Capital Regulation


Jeremy Bulow


Stanford University; National Bureau of Economic Research (NBER)

Paul Klemperer


University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

September 2013

Rock Center for Corporate Governance at Stanford University Working Paper No. 151
Stanford University Graduate School of Business Research Paper No. 2132; Stanford University Graduate School of Business Research Paper No. 13-3
Nuffield College Oxford, Economics Working Paper 2013-W12

Abstract:     
Today’s regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is “ERNs” (equity recourse notes -- superficially similar to, but importantly distinct from, “cocos”) which gradually “bail in” equity when needed. Importantly, although our system uses market information, it does not rely on markets being “right.”

Number of Pages in PDF File: 68

Keywords: bail-in, bank, bank capital, bank crisis, capital requirements, contingent capital, contingent convertible bond, debt overhang, deposit insurance, living wills, regulatory capital, regulatory forbearance, SIFI, systemically important financial institution, too-big-to-fail

JEL Classification: G21, G10, G28, G32

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Date posted: August 29, 2013 ; Last revised: November 13, 2013

Suggested Citation

Bulow, Jeremy and Klemperer, Paul, Market-Based Bank Capital Regulation (September 2013). Rock Center for Corporate Governance at Stanford University Working Paper No. 151 ; Stanford University Graduate School of Business Research Paper No. 2132; Stanford University Graduate School of Business Research Paper No. 13-3; Nuffield College Oxford, Economics Working Paper 2013-W12. Available at SSRN: http://ssrn.com/abstract=2317043 or http://dx.doi.org/10.2139/ssrn.2317043

Contact Information

Jeremy I. Bulow (Contact Author)
Stanford University ( email )
Room L 237
Stanford, CA 94305-5015
United States
650-723-2160 (Phone)
650-725-0468 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Paul Klemperer
University of Oxford - Department of Economics ( email )
Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278 588 (Phone)
+44 1865 278 557 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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