Capital Levels and Risk-Taking Propensity in Financial Institutions

Accounting and Finance Research, 3 (1), 85-89, (2014)

Swiss Finance Institute Research Paper No. 13-33

11 Pages Posted: 8 Jun 2013 Last revised: 9 Jan 2020

See all articles by Giovanni Barone-Adesi

Giovanni Barone-Adesi

University of Lugano; Swiss Finance Institute

Walter Farkas

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zürich

Pablo Koch-Medina

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Date Written: May 27, 2013

Abstract

Regulators dedicate much attention to the option that financial institutions in distress have to transfer losses to their creditors. It is generally recognized that the existence of this option provides intermediaries with a powerful incentive to keep firm capital close to the minimal requirement. We argue that undercapitalization however harms profitable growth opportunities. Our model quantifies the interaction of these incentives and derives implications for regulation.

Keywords: risk propensity, net tangible value, default option, franchise value

JEL Classification: G31, G32, G18

Suggested Citation

Barone-Adesi, Giovanni and Farkas, Walter and Koch-Medina, Pablo, Capital Levels and Risk-Taking Propensity in Financial Institutions (May 27, 2013). Accounting and Finance Research, 3 (1), 85-89, (2014) ; Swiss Finance Institute Research Paper No. 13-33. Available at SSRN: https://ssrn.com/abstract=2274639 or http://dx.doi.org/10.2139/ssrn.2274639

Giovanni Barone-Adesi (Contact Author)

University of Lugano ( email )

Via Buffi 13
CH-6904 Lugano
Switzerland
+41 58 666 4671 (Phone)
+41 58 666 46 47 (Fax)

Swiss Finance Institute

c/o University of Geneva
40 Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Walter Farkas

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland
+41-44-634 3953 (Phone)
+41-44-634 4345 (Fax)

HOME PAGE: http://https://people.math.ethz.ch/~farkas/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Pablo Koch-Medina

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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