How Does the Stock Market View Bank Regulatory Capital Forbearance Policies?

Forthcoming, Journal of Money, Credit and Banking

74 Pages Posted: 10 Dec 2014 Last revised: 3 Aug 2019

See all articles by Van Son Lai

Van Son Lai

Université Laval

Xiaoxia Ye

University of Liverpool Management School

Date Written: July 26, 2019

Abstract

During the subprime crisis, the FDIC has shown, once again, laxity in resolving and closing insolvent institutions. Ronn and Verma (1986) call the tolerance level below which a bank closure is triggered the regulatory policy parameter. We derive a model in which we make this parameter stochastic and bank-specific to infer the stock market view of the regulatory capital forbearance value. For 565 U.S. listed banks during 1990 to 2012, the countercyclical forbearance fraction in capital, most substantial in recessions, could represent 17%, on average, of the market valuation of bank equity and could go as high as 100%.

Keywords: Bank regulatory closure rules or policy parameter, bank insolvency, regulatory forbearance, market-based closure rules, financial crises

JEL Classification: G17, G21, G28

Suggested Citation

Lai, Van Son and Ye, Xiaoxia, How Does the Stock Market View Bank Regulatory Capital Forbearance Policies? (July 26, 2019). Forthcoming, Journal of Money, Credit and Banking, Available at SSRN: https://ssrn.com/abstract=2536017 or http://dx.doi.org/10.2139/ssrn.2536017

Van Son Lai

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

Xiaoxia Ye (Contact Author)

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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