Prudent Banks and Creative Mimics: Can We Tell the Difference?

Posted: 8 Jan 2012

See all articles by Andrew Powell

Andrew Powell

Universidad Torcuato Di Tella - School of Business; Inter-American Development Bank (IDB); Harvard University - Center for International Development (CID)

Marcus Miller

affiliation not provided to SSRN

Antonia Maier

affiliation not provided to SSRN

Date Written: December 2011

Abstract

The recent financial crisis has forced a rethink of banking regulation and supervision and the role of financial innovation. This paper develops a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium, but deposit insurance will tend to increase the level of capital required. If supervision detects risky behavior ex ante then it is complementary to capital regulation. However, financial innovation may erode supervisors’ ability to detect risk and capital levels should then be higher. Regulators, however, may not be aware their capacities have been undermined. The paper argues for a four-prong policy response with higher bank capital ratios, enhanced supervision, limits to the use of complex financial instruments and Coco’s. The results may support the institutional arrangements proposed recently in the United Kingdom.

JEL Classification: D82, G21, G38, L51

Suggested Citation

Powell, Andrew P. and Powell, Andrew P. and Miller, Marcus and Maier, Antonia, Prudent Banks and Creative Mimics: Can We Tell the Difference? (December 2011). IDB Working Paper No. IDB-WP-284, Available at SSRN: https://ssrn.com/abstract=1981545

Andrew P. Powell (Contact Author)

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina
+5411 4787-9349 (Phone)
+5411 4783-3220 (Fax)

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Marcus Miller

affiliation not provided to SSRN

Antonia Maier

affiliation not provided to SSRN

No Address Available

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