The paper studies risk mitigation associated with capital regulation, in a context when banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an...

This paper presents new measures of market power rents in loan and deposit markets and examines their impact on bank risk-taking. These new measures are derived from optimality conditions common to a wide variety of theoretical models of banks operating under uncertainty and choosing their risk...