We develop a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency risk. In this model, banks face taxation, flotation costs of securities, and default costs and maximize shareholder value by making their financing, liquid asset holdings, and...

This paper addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III Leverage Ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a...

This paper addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III leverage ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a...

This paper examines how banks' asset risk is affected by the level (i.e. group or business unit) at which regulatory requirements are applied. We develop a theoretical model and calibrate it to UK banks. Our main finding is that the impact differs depending on which regulatory constraint is...

We assess the impact of leverage ratio (LR) requirements on risk-taking behaviour of banks theoretically, using a simple model, and empirically, using a difference-in-differences analysis that compares behaviour of banks subject to UK LR requirements (LR-banks) to otherwise similar banks...

As a result of the Enron scandal, new regulations were enacted that increased the capital charge for holding assets in off-balance sheet vehicles. I utilize a triple difference specification to identify the effect of this exogenous regulatory shock on bank systematic risk exposure. I find that...

The financial crisis exposed enormous failures of risk management by financial institutions and of the authorities' regulation and supervision of these institutions. Reforms introduced as part of Basel III have tackled some of the most important fault‐lines. As the focus now shifts toward the...

A model is presented that shows when (Basel Accord) capital standards and (FDIC) insurance premiums primarily reflect a bank's physical expected default losses, a bank can increase its shareholder value by making loans and investing in bonds that have relatively high systematic risk. Such an...

History shows that prohibition diminishes the supply of capital and raises its returns. However, for value-added investors such as private equity investments, regulation potentially reduces capital quality. The regulatory measures introduced in Basel II Capital Framework and in the EU Capital...