This paper investigates bank portfolio composition under Basel II where the amount of required capital is determined by bank's own risk assessment. We particularly show that in presence of asymmetric information between the bank and the supervisor, it has incentives to understate its risk taking...

The Basel III Accord imposes minimum liquidity standards on bank balance sheets that are already constrained by minimum capital standards. It is not clear whether or how banks' behaviors will change in this new joint-constraint regime. To gain some insight, we study the balance sheet liquidity...