XXVI Edition

14-15-16 December 2017"

Optimal Bank Capital Requirements: An Asymmetric Information Perspective

Marcelletti Alessandra , LUISS University
Berardi Simone , School of European Political Economy - LUISS

The issue on the amount of capital banks should hold has pushed back the debate on top of policymakers' agenda. Literature on this field mainly focuses on how to prevent banks from gaming risk-weighted capital requirements. The analysis has provided different types of solutions, such as the introduction of penalties and complementary use of risk-sensitive capital requirements and leverage ratio. Although the majority of theoretical papers rely on an asymmetric information framework, only one source of asymmetry is taken into account. The paper fills this gap by studying how to implement a socially optimal regulation scheme that simultaneously faces moral hazard and adverse selection problems. Including both sources of asymmetry is crucial because of the supervisor's inability to distinguish between risk profiles and misconduct (risk-shifting behavior) of banks.

Area: Financial Regulation and Supervision

Keywords: bank capital requirements; bank regulation; moral hazard; adverse selection

Il paper è coperto da copyright.

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