Dynamic prudential regulation
Subtitle: is prompt corrective action optimal?
By: by Ilhyock Shim
Contributors: Bank for International Settlements. Monetary and Economic Department
Series: BIS working papers -- no. 206; BIS working papers (Online) -- no. 206.
Publisher: Bank for International Settlements
Published: 2006
Place of publication: Basel, Switzerland
Language: eng
Format: [electronic resource] :
Description: Prompt Corrective Action (PCA) prescribes prompt and deterministic termination of banks with insufficient levels of book-value capital. This paper investigates whether reliance on book-value capital is a good policy choice and if PCA is an optimal regulatory approach. I use a variant of DeMarzo and Fishman's (2004) dynamic model of entrepreneurial finance to model interactions between a banker and a regulator. Under hidden choice of risk, private information on returns, limited commitment by the banker and costly liquidation, I first characterize the optimal incentive-feasible allocation, and then demonstrate that the optimal allocation is implementable through the combination of a risk-based deposit insurance premium and a book-value capital regulation with prompt and stochastic termination/bailout rather than deterministic termination with no bailout as in PCA. I also show that partial termination can be used instead of stochastic termination.
Notes: Title from PDF file (viewed on May 31, 2006).

"Monetary and Economic Department."

"May 2006."

Includes bibliographical references.

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