Dynamic prudential regulation :
is prompt corrective action optimal? /
by Ilhyock Shim.

Description

Main Author

Shim, Ilhyock.

Related Names

Bank for International Settlements. Monetary and Economic Dept.

Language(s)

English

Published

Basel, Switzerland : Bank for International Settlements, c2006.

Subjects

Bank capital > Bank capital / Econometric models.

Summary

Prompt Corrective Action (PCA) prescribes prompt and deterministic termination of banks with insufficient levels of book-value capital. This paper investigates whether reliance on book-value capital is a good policy choice and if PCA is an optimal regulatory approach. I use a variant of DeMarzo and Fishman's (2004) dynamic model of entrepreneurial finance to model interactions between a banker and a regulator. Under hidden choice of risk, private information on returns, limited commitment by the banker and costly liquidation, I first characterize the optimal incentive-feasible allocation, and then demonstrate that the optimal allocation is implementable through the combination of a risk-based deposit insurance premium and a book-value capital regulation with prompt and stochastic termination/bailout rather than deterministic termination with no bailout as in PCA. I also show that partial termination can be used instead of stochastic termination.

Note

"May 2006."
"Monetary and Economic Department."

Physical Description

57 p. : ill. ; 28 cm.

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