"This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks' risk choice, even though all agents...

Two of the most significant banking reforms to come out of the banking problems in the late 1980s and early 1990s were the increase in capital requirements from Basel 1 and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991...

Since the Basle capital regulations of 1988 and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, capital requirements have been a critical part of bank regulation. These requirements limit leverage by requiring and encouraging banks to hold minimum levels of equity....