Acharya, Viral V. (2003), Is the International Convergence of Capital Adequacy Regulation Desirable?, Journal of Finance, 58(6), 2745-2782.
Acharya, Viral V. (2009), A Theory of Systemic Risk and Design of Prudential Bank Regulation, Journal of Financial Stability, 5(3), 224-255.
Acharya, Viral V., Thomas Cooley, Matthew Richardson, and Ingo Walter (2009), Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-2009, Foundations and Trends in Finance, 4(4), 247-325.
Acharya, Viral V., Lasse H. Pedersen, Thomas Philippon, and Matthew Richardson (2010), Measuring Systemic Risk, Federal Reserve Bank of Cleveland Working Paper.
Acharya, Viral V. and Matthew Richardson (2009), Restoring Financial Stability: How to Repair a Failed System?, An Independent View from New York University Stern School of Business, John Wiley & Sons.
Acharya, Viral V. and Tanju Yorulmazer (2007), Too Many to Fail–An Analysis of Time-Inconsistency in Bank Closure Policies, Journal of Financial Intermediation, 16(1), 1-31.
Angora, Alain, Isabelle Distinguin, and Clovis Rugemintwari (2009), Excess Capital of European Banks: Does Bank Heterogeneity Matter?, Working Paper.
Berger, Allen, Robert DeYoung, Mark Flannery, Ozde Oztekin, and David Lee (2008), Why Do Large Banking Organizations Hold So Much Capital, Journal of Financial Services Research, 34, 123-150.
Bichsel, Robert and Jurg Blum (2004), The Relationship Between Risk and Capital in Swiss Commercial Banks: A Panel Study, Applied Financial Economics, 14, 591-597.
Basel Committee on Banking Supervision and Financial Stability Board (2010), Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements Interim Report.
BIS (2010), Group of Governors and Heads of Supervision Announces Higher Global Minimum Capital Standards, Bank for International Settlements, http://bis.org/press/p100912.htm.
Boot, Arnoud W.A. and Stuart I. Greenbaum (1993), Bank Regulation, Reputation, and Rents: Theory and Policy Implications, in Capital Markets and Financial Intermediation, ed. C. Mayer and X. Vives, Cambridge University Press.
Brunnermeier, Markus and Lasse H. Pedersen (2008), Market Liquidity and Funding Liquidity, Review of Financial Studies, 22(6), 2201-2238.
Caminal, Ramon and Carmen Matutes (2002), Market Power and Banking Failures, International Journal of Industrial Organization, 20(9), 1341-1361.
De Jonghe, Olivier (2010), Back to the Basics in Banking? A Micro-Analysis of Banking System Stability, Journal of Financial Intermediation, 19(3), 387-417.
Flannery, Mark (1989), Capital Regulation and Insured Banks’ Choice of Individual Loan Default Risks, Journal of Monetary Economics, 24(2), 235-258.
Furlong, Frederick and Simon Kwan (2005), Market-to-Book, Charter Value, and Bank Risk-Taking – A Recent Perspective, Federal Reserve Bank of San Francisco, Working Paper.
Hellmann, Thomas F., Kevin C. Murdock, and Joseph E. Stiglitz (2000), Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?, American Economic Review, 90(1), 147-165.
Holmstrom, Bengt and Jean Tirole (1997), Financial Intermediation, Loanable Funds and the Real Sector, The Quarterly Journal of Economics, 112(3), 663-691.
Huang, Rocco and Lev Ratnovski (2011), The Dark Side of Bank Wholesale Funding, Journal of Financial Intermediation, 20(2), 248-263
IMF [International Monetary Fund] (2010), Technical Note on Stress Testing, Publication of Financial Sector Assessment Program Documentation, IMF Country Report No. 10/244, July 2010.
Jensen, Michael C. (1986), Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review, 76(2), 323-329.
Jensen, Michael C. and William H. Meckling (1976), Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 3(4), 305-360.
Kahane, Yehuda (1977), Capital Adequacy and the Regulation of Financial Intermediaries, Journal of Banking and Finance, 1, 207-218.
Koehn, Michael and Anthony M. Santomero (1980), Regulation of Bank Capital and Portfolio Risk, Journal of Finance, 35, 1235-1244.
Matutes, Carmen and Xavier Vives (2000), Imperfect Competition, Risk Taking, and Regulation in Banking, European Economic Review, 44, 1-34.
Myers, Stewart and Nicholas Majluf (1984), Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have, Journal of Financial Economics, 13(2), 187-221.
Repulo, Rafael (2004), Capital Requirements, Market Power, and Risk-Taking in Banking, Journal of Financial Intermediation, 13, 156-182.
Shin, Hyun Song (2009), Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis, Journal of Economic Perspectives, 23(1), 101-119.
Appendix I: Proofs
Appendix II: Extensions
Mr. Perotti is with the University of Amsterdam and the Dutch Central Bank. Mr. Vlahu is with the Dutch Central Bank. We thank Douglas Gale, Andrew Winton, Stijn Claessens, Giovanni Dell’Ariccia, Dale Gray, Alexander Guembel, Thomas Nitschka, Javier Suarez, as well as participants at seminars at DNB, IMF, 14th Swiss Society for Financial Markets conference, IJCB 3rd Financial Stability conference, 2011 International Risk Management conference, 2011 Finlawmetrics conference and 2011 IFABS conference for helpful comments. Any errors are ours. Vlahu gratefully acknowledges financial support by the Gieskes-Strijbis Foundation. The views expressed in this paper are those of the authors and should not be attributed to the Dutch Central Bank or the International Monetary Fund.
The fact that adjustment costs of bank equity raising are significant was highlighted, for example, in the Basel Committee-FSF (2010) assessment of the impact of the transition to stronger capital requirements.
Recent studies develop different measures for banks’ tail risk. Acharya and Richardson (2009), Adrian and Brunnermeier (2009), and De Jonghe (2010) compute realized tail risk exposure over a certain period by using historical evidence of tail risk events, while Knaup and Wagner (2010) propose a forward-looking measure for bank tail risk.
The presence of not fully risk-based deposit insurance is an inherent feature of most contemporary banking systems, and one of main rationales for bank regulation (Dewatripont and Tirole, 1994).
The assumption that project choice is unobservable while project returns are, is a standard approach to modelling (Hellman et al. 2000, Rochet 2004).