Citation

Discussion Paper Details

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Full Details

Title: Banking-on-the-Average Rules

Author(s): Hans Gersbach and Volker Hahn

Publication Date: May 2010

Keyword(s): banking crisis, banking on the average, banking system and equity-capital requirements

Programme Area(s): Financial Economics

Abstract: In this paper, we introduce a new requirement for bank capital: banking-on-the-average rules. Under these rules a bank?s required level of equity capital is monotonically increasing in the realized equity capital of its peers. In a simple model we illustrate the workings of banking-on-the-average rules. We show that in booms these rules can prevent banks from taking excessive risks. Moreover, they alleviate the socially harmful procyclicality of conventional equity-capital rules, which may induce banks to cut back excessively on lending. Finally, we argue that under these rules prudent banks can impose prudency on other banks. In addition, banking-on-the-average rules ensure the build-up of bank equity capital in booms and thus avoid excessive leverage.

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Bibliographic Reference

Gersbach, H and Hahn, V. 2010. 'Banking-on-the-Average Rules'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7819