Capital Regulation and Tail Risk

Author/Editor:

Enrico Camillo Perotti ; Lev Ratnovski ; Razvan Vlahu

Publication Date:

August 1, 2011

Electronic Access:

Download PDF. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.

Series:

Working Paper No. 11/188

Subject:

English

Publication Date:

August 1, 2011

ISBN/ISSN:

9781462308262/1018-5941

Stock No:

WPIEA2011188

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

38

Please address any questions about this title to publications@imf.org