Capital and liquidity in a dynamic model of banking Articles
Overview
published in
- ECONOMIC MODELLING Journal
publication date
- August 2017
start page
- 172
end page
- 177
volume
- 64
Digital Object Identifier (DOI)
full text
International Standard Serial Number (ISSN)
- 0264-9993
Electronic International Standard Serial Number (EISSN)
- 1873-6122
abstract
- This paper analyzes capital requirements in combination with a particular kind of cash reserves, that are invested in the risk-free asset, from now on, compensated reserves. We consider a dynamic framework of banking where competition may induce banks to gamble. In this set up, we can capture the two effects that capital regulation has on risk, the capital-at-risk effect and the franchise value effect (Hellman et al., 2000). We show that while capital alone is an inferior policy, compensated reserves, will complement capital requirements, by creating franchise value, and are therefore efficient in solving moral hazard problems.
Classification
subjects
- Business
- Economics
keywords
- capital requirements; compensated reserves; dynamic framework; moral hazard