Optimal Bank Capital with Costly Recapitalization

@inproceedings{Peura2006OptimalBC,
  title={Optimal Bank Capital with Costly Recapitalization},
  author={Samu Peura and Jussi Keppo},
  year={2006}
}
We study optimal bank capital choice as a dynamic tradeoff between the opportunity cost of equity, the loss of franchise value following a regulatory minimum capital violation, and the cost of recapitalization. Our model indicates that a recapitalization option may be valuable despite substantial delays and costs of capital issuance, and that a significant fraction of the value of low capitalized banks may be attributable to the option to recapitalize. We calibrate the model to bank accounting… CONTINUE READING

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