ABSTRACT:The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues ofmoral hazard. To reflect conditions prevailing in UK banking, however, we incorporate market powerand risk-taking by banks with limited liability, with explicit analytical results for the...

In this paper we present a model of executive compensation to analyze the link between incentive compensation and risk taking. Our model takes into account the loss in the value of an executive's expected wealth from employment if the firm becomes insolvent during a bad state of the economy. We...

The current financial crisis has raised queries about the adequacy of the present regulatory regime. Whilst the immediate priority may be to plug the obvious holes in the system, there are some long-term generic problems with almost any system of financial regulation. This paper explores one...

Central banks (CBs) in Europe and the US have been providing virtually unlimited amounts of liquidity to banks for quite some time now. This may lead banks to expect that these CBs will be lenient in the future. Will this expectation be justified? I present a model in which a commercial bank,...

The lack of portfolio granularity in terms of exposure has been shown to have important implications for the amount of a financial institution’s economic capital. Based on a numerical simulation model, we provide concrete examples of how granularity affects capital levels. We achieve this by...

After the destructive impact of the global financial crisis of 2008, many believe that pre-crisis financial market regulation did not take the "big picture" of the system suffciently into account and, subsequently, financial supervision mainly "missed the forest for the trees". As a result, the...

In the wake of the global financial crisis that erupted in 2008, there has been extensive commentary and regulatory focus on the 'Too Big to Fail' issue. In this paper, we survey the proposed solutions and regulatory initiatives that have been undertaken. We conduct a longitudinal analysis of...

We analyze the pledging behavior of Euro area banks during the introduction of the liquidity coverage ratio (LCR). The LCR considers only a subset of central bank eligible assets and thereby offers banks an arbitrage opportunity to improve their regulatory ratio by altering their collateral...

The lack of portfolio granularity in terms of exposure has been shown to have important implications for the amount of a financial institution's economic capital. Based on a numerical simulation model, we provide concrete examples of how granularity affects capital levels. We achieve this by...

We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an...