Capital Regulation and Tail Risk

39 Pages Posted: 16 Aug 2011

See all articles by Lev Ratnovski

Lev Ratnovski

International Monetary Fund; European Central Bank, Financial Research Division

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Razvan Vlahu

De Nederlandsche Bank

Multiple version iconThere are 5 versions of this paper

Date Written: August 2011

Abstract

The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.

Suggested Citation

Ratnovski, Lev and Perotti, Enrico C. and Vlahu, Razvan, Capital Regulation and Tail Risk (August 2011). IMF Working Paper No. 11/188, Available at SSRN: https://ssrn.com/abstract=1910491

Lev Ratnovski (Contact Author)

International Monetary Fund ( email )

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European Central Bank, Financial Research Division

Germany

Enrico C. Perotti

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

HOME PAGE: http://www.fee.uva.nl/fm/people/pero.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Razvan Vlahu

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands
+31205242483 (Phone)
+31205242506 (Fax)

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