Bank Capital Standards for Market Risk: A Welfare Analysis

. We propose a simple model that is suitable for evaluating alternative bank capital regulatoryproposals for market risk. Our model formalizes the conflict between bank objectives andregulatory goals. Banks" decisions represent a tension between their desire to exploit the depositinsuranceput option and their desire to preserve franchise value. Regulators seek to balance thesocial value of deposits in mediating transactions against the deadweight costs of failure resolution.Our social...