Kiel Working Papers, Kiel Institute for World Economics
No 1105:
The Relationship between Bank Capital, Risk-Taking, and Capital Regulation: A Review of the Literature
Stéphanie Stolz
Abstract: Bank capital regulation seems to be todayÂ’s most accepted
regulatory instrument. The reasoning is that limited liability and deposit
insurance appear to give banks incentives for excessive risk-taking.
Capital requirements can alleviate this problem as banks are obliged to
hold more capital which forces them to have more of their own funds at
risk. But the theoretical literature has much more to say on how banks
determine their capital structure and portfolio risk and how capital
regulation influences this decision. This paper attempts to give an
overview of the literature in order to see what theory suggests, what
empirics seem to tell us, and what there is still to do for future
research.
Keywords: Banking regulation, deposit insurance, capital structure; (follow links to similar papers)
JEL-Codes: G2; (follow links to similar papers)
34 pages, May 2002
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