DP2597 Bank Capital Regulation with Random Audits

Author(s): Sudipto Bhattacharya, Manfred Plank, G√ľnter Strobl, Josef Zechner
Publication Date: October 2000
Keyword(s): Bank Capital Regulation, Bankers' Rents, Closure Rules, Poisson Audits, Risk-Shifting Incentives
JEL(s): G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2597

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.