Robust Capital Regulation

11 Pages Posted: 30 May 2012

See all articles by Viral V. Archarya

Viral V. Archarya

New York University (NYU) - Leonard N. Stern School of Business

Hamid Mehran

Independent

Til Schuermann

Oliver Wyman

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Date Written: May 2012

Abstract

Regulators and markets can find the balance sheets of large financial institutions difficult to penetrate, and they are mindful of how undercapitalization can create incentives to take on excessive risk. This study proposes a novel framework for capital regulation that addresses banks' incentives to take on excessive risk and leverage. The framework consists of a special capital account in addition to a core capital requirement. The special account would accrue to a bank's shareholders as long as the bank is solvent, but would pass to the bank's regulators — rather than its creditors — if the bank fails. By design, this special account thus limits risk taking, but ensures that creditors' disciplining incentives are preserved.

Keywords: Treasury, Supplementary Financing Program , Treasury General Account, Treasury Tax and Loan Note account, cash management , Supplementary Financing Program

JEL Classification: G12, G21

Suggested Citation

Archarya, Viral V. and Mehran, Hamid and Schuermann, Til and Thakor, Anjan V., Robust Capital Regulation (May 2012). Current Issues in Economics and Finance, Vol. 18, No. 4, 2012, Available at SSRN: https://ssrn.com/abstract=2070102 or http://dx.doi.org/10.2139/ssrn.2070102

Viral V. Archarya

New York University (NYU) - Leonard N. Stern School of Business

44 W 4th St
Suite 9-160
New York, NY 10012
United States

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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