This paper presents a dynamic model of banking supervision to analyze the impact of each of Basell II three pillars on banks’ risk taking. We extend previous literature providing an analysis of ratings-based supervisory policies. In Pillar 2 (supervisory review) the supervisor audits more...

This paper analyzes the determinants of regulatory capital (the minimum required by regulation) and economic capital (the capital that shareholders would choose in absence of regulation) in the context of the single risk factor model that underlies the New Basel Capital Accord (Basel II). The...