Unintended Consequences of the Market Risk Requirement in Banking Regulation *

  • Jussi Keppo Leonard Kofman Xu Meng
  • Published 2007


We analyze a bank that operates under the Basel credit and market risk requirements, and that maximizes its value through recapitalizations, dividends, and liquid asset investments. According to our model, the market risk requirement may postpone recapitalization and this way increase the bank’s default probability. We show that this is indeed the case if… (More)

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