Banking and optimal capital ratio in an equilibrium model

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Larsson, BoStockholms universitet,Högskolan Dalarna,Nationalekonomi,Nationalekonomiska institutionen (författare)

The author address the question of optimal capital ratio in banking, particularly the fact that banks' risk-weighted capital is substantially larger than the stipulated reserve requirements by the Bank of International Settlements. With a factor model for the value of entrepreneurs' projects and costly state verification as asymmetric information structure, the author shows that banks choose to hold capital reserves that are almost large enough to eliminate the risk for their depositors. The reason is that the cost of lowering the risk for the bank, up to a point, is lower than their gain from cheaper deposits. Banking risk stems from borrowers being correlated. This has been an important lesson during the ongoing financial crisis where several banks underestimated the correlation in their loan portfolios and suffered severe credit losses. This could also explain why small regional banks in Sweden often have more than twice the capital ratio of their nationwide competitors.

SAMHÄLLSVETENSKAP Ekonomi och näringsliv Nationalekonomi hsv//swe
SOCIAL SCIENCES Economics and Business Economics hsv//eng
banking risk; costly state verification; CSV; credit risk; correlated borrowers; capital ratio; equilibrium modelling; capital reserves; small regional banks; national banks; Sweden.
Complex Systems – Microdata Analysis
Komplexa system - mikrodataanalys

Ingår i:International Journal of Banking, Accounting and Finance: Inderscience Publishers2:4, s. 309-3311755-38301755-3849

Om ämnet

SAMHÄLLSVETENSKAP: SAMHÄLLSVETENSKA ...; och Ekonomi och näri ...; och Nationalekonomi

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