Regulating Bank Capital Structure to Control Risk

FRB Richmond Economic Quarterly, Vol. 87, No. 3, Summer 2001, pp. 35-52

18 Pages Posted: 30 Nov 2012

See all articles by Edward S. Prescott

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: 2001

Abstract

Since the Basle capital regulations of 1988 and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, capital requirements have been a critical part of bank regulation. These requirements limit leverage by requiring and encouraging banks to hold minimum levels of equity. This article uses the agency theory of corporate finance to study how capital requirements control bank risk taking. It finds that existing capital regulations can be made more effective if augmented with financial instruments like warrants or convertible debt.

Suggested Citation

Prescott, Edward (Ned) Simpson, Regulating Bank Capital Structure to Control Risk (2001). FRB Richmond Economic Quarterly, Vol. 87, No. 3, Summer 2001, pp. 35-52. Available at SSRN: https://ssrn.com/abstract=2182658

Edward (Ned) Simpson Prescott (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

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