We show that in an imperfect information environment the equity value of an impaired bank may increase or decrease when it is required to meet a capital standard. Regardless of the change in the bank's equity value, however, its stock price will fall in response to a forced recapitalization, consistent with recent empirical evidence. Simulations of our model suggest that this stock price decline is likely to be larger the smaller is the share of ownership held by the managers of the bank, also consistent with recent empirical evidence in the literature. Our model further predicts a rise in bank's non-interest expenses following a required recapitalization. Given the increase in the regulator's exposure that would accompany a reduction in the bank's market value of equity, the regulator may choosenotto enforce the regulation. Hence, capital regulation may be time-inconsistent in this situation and consequently not have its intended risk-mitigating incentives

This paper examines the impact of the risk-based capital (RBC) requirements on bank cost efficiencies. We take into consideration both on- and off-balance sheet (OBS) products and allow product mixes to differ across banks and to vary over time. Our empirical results suggest that the cost structures of large banks are significantly different during the pre-RBC and post-RBC periods. That is, the RBC change seemed to reduce the optimal bank size that achieves maximum scale and scope economies, so that some of the large banks that previously were efficient became too large and inefficient. The results suggest that regulations that encourage large banks to expand their production and product mixes any further will likely result in a less efficient banking industry

The ostensible purpose of the Basle Accord was to standardize bank-capital regulations among the twelve leading industrial countries. Its ulterior goal was to 'level the playing field' by eliminating a funding-cost advantage of Japanese banks that had allowed them to capture more than one-third of international lending. The wealth gain for Japanese bank shareholders was 31.63 percent. Wealth effects for shareholders of non-Japanese banks were not significant. These results suggest that the Baste Accord did not eliminate the pricing advantage of Japanese banks, challenging the non-Japanese regulators' contention that the regulation would help level the playing field

The ostensible purpose of the Basle Accord was to standardize bank-capital regulations among the twelve leading industrial countries. Its ulterior goal was to 'level the playing field' by eliminating a funding-cost advantage of Japanese banks that had allowed them to capture more than one-third of international lending. The wealth gain for Japanese bank shareholders was 31.63 percent. Wealth effects for shareholders of non-Japanese banks were not significant. These results suggest that the Baste Accord did not eliminate the pricing advantage of Japanese banks, challenging the non-Japanese regulators' contention that the regulation would help level the playing field

The ostensible purpose of the Basle Accord was to standardize bank‐capital regulations among the twelve leading industrial countries. Its ulterior goal was to “level the playing field” by eliminating a funding‐cost advantage of Japanese banks that had allowed them to capture more than one‐third of international lending. The wealth gain for Japanese bank shareholders was 31.63 percent. Wealth effects for shareholders of non‐Japanese banks were not significant. These results suggest that the Basle Accord did not eliminate the pricing advantage of Japanese banks, challenging the non‐Japanese regulators' contention that the regulation would help level the playing field

Previous studies of bank subordinated debenture yields have detected scant evidence that market investors rationally price bank-specific default risks. However, investors' incentives to monitor their banks' true default risks have increased over the past decade, as federal regulators have removed the conjectural guarantees on subordinated debentures that were so prominent in the period following Continental Illinois' failure. By examining debenture yields over the period 1983-91, we demonstrate that subordinated debenture prices reflect accounting risk measures, and that the market's sensitivity to bank-specific risks has rationally reflected changes in the government's policy toward absorbing private losses in the event of a bank failure. Although this evidence does not establish that market discipline can effectively control banking firms, it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major U.S. banking firms

The papers by Venkatachalam (1996) and Aboody (1996) provide some interesting evidence on issues that are important to accounting regulators as well as accounting academics. However, for econometric as well as economic reasons, there are limits to what we can learn from this type of research (cross-sectional ‘levels’ studies). Careful attention to methodological issues in this type of research design can reduce, but likely will not eliminate, these interpretational difficulties