The Impact of Capital-Based Regulation on Bank Risk-Taking: A Dynamic Model

Posted: 19 May 1998

See all articles by Paul S. Calem

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Rafael Rob

University of Pennsylvania - Department of Economics

Date Written: March 1996

Abstract

In this paper, we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model suggests that two aspects of the new regulatory environment may have unintended effects: higher capital requirements may lead to increased portfolio risk, and capital-based premia do not deter risk-taking by well-capitalized banks. On the other hand, risk-based capital standards may have favorable effects provided the requirements are stringent enough.

JEL Classification: G21, G28

Suggested Citation

Calem, Paul S. and Rob, Rafael, The Impact of Capital-Based Regulation on Bank Risk-Taking: A Dynamic Model (March 1996). Available at SSRN: https://ssrn.com/abstract=7321

Paul S. Calem (Contact Author)

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

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Rafael Rob

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6775 (Phone)
215-573-2057 (Fax)

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