The global financial crisis has confirmed the global regulatory mechanism weakness in the prevention of the causes and consequences in stress situations. As an expression of inadequacy, Basel Committee designed Basel III standard as a new regulatory framework for banks. Its implementation...

We investigate actual capital chosen by banks in presence of capital minimum requirements and ex-post penalties for violating them. The model yields excess capital that is always positive and increases during times of distress in the economy, which is in line with empirical evidence. Next, we...