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Discussion Paper Details

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Title: Bank Capital Regulation with Random Audits

Author(s): Sudipto Bhattacharya, Manfred Plank, Günter Strobl and Josef Zechner

Publication Date: October 2000

Keyword(s): Bank Capital Regulation, Bankers' Rents, Closure Rules, Poisson Audits and Risk-Shifting Incentives

Programme Area(s): Financial Economics

Abstract: We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the bank's asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholders/managers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the bank, and of the auditing frequency are examined.

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Bibliographic Reference

Bhattacharya, S, Plank, M, Strobl, G and Zechner, J. 2000. 'Bank Capital Regulation with Random Audits'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2597