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THE VALUE IMPACTS OF CAPITAL ADEQUACY REGULATION AND STOCHASTIC DEPOSITS
Author(s) -
Brauer Greggory A.
Publication year - 1984
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1984.tb00359.x
Subject(s) - ceteris paribus , soundness , economics , capital adequacy ratio , equity (law) , capital requirement , probability of default , debt , unintended consequences , value (mathematics) , monetary economics , basel ii , capital (architecture) , actuarial science , financial economics , microeconomics , profit (economics) , finance , mathematics , statistics , credit risk , archaeology , history , linguistics , philosophy , political science , law
The relationship between a bank's soundness and the set of factors evaluated by supervisory agencies is so complex that the regulation of certain factors might have unintended consequences. This paper demonstrates that, ceteris paribus , binding capital adequacy regulation in the presence of stochastic deposits both reduces the expected future value of a bank and increases the uncertainty of that bank's future value. The uncertainty conclusion is not inconsistent with the notion of a decrease in the probability of financial distress as equity is substituted for debt; it involves an altogether different uncertainty and one that has heretofore not been recognized in either the theory of the banking firm or the literature of capital adequacy.