Tailoring Bank Capital Regulation for Tail Risk

Nataliya Klimenko (1)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

The experience of the 2007-09 financial crisis has showed that the bank capital regulation in place was inadequate to deal with "manufacturing" tail risk in the financial sector. This paper proposes an incentive-based design of bank capital regulation aimed at efficiently dealing with tail risk engendered by bank top managers. It has two specific features: (i) first, it incorporates information on the optimal incentive contract between bank shareholders and bank managers, thereby dealing with the internal agency problem; (ii) second, it relies on the mechanism of mandatory recapitalization to ensure this contract is adopted by bank shareholders.

Mots clés: recapitalization; incentive compensation; moral hazard; capital requirements; tail risk

Domaines: Economies et finances

Nataliya Klimenko. Tailoring Bank Capital Regulation for Tail Risk. 2013. ⟨halshs-00796490⟩