We propose a simple model that is suitable for evaluating alternative bank capital regulatory proposals for market risk. Our model formalizes the conflict between bank objectives and regulatory goals. Banks' decisions represent a tension between their desire to exploit the deposit-insurance put...

A moral hazard model with exogenous bank franchise value is used to analyze bank capital regulation. Banks choose their capital structure as well as the riskiness and mean of their portfolio. The portfolio mean is determined by the level of costly screening. Screening and portfolio risk are...