American Economic Review Vol. 95 No. 5 2005

Crises and Capital Requirements in Banking

Alan D. Morrison¹; Lucy White²

¹ Saïd Business School, University of Oxford, Park End Street, Oxford OX1 3SE, U.K. · ² Finance Department, Harvard Business School, Morgan Hall 387, Soldiers Field Road, Boston MA 02163; FAME, Ecole des Haute Etudes Commerciales, Université de Lausanne; and CEPR.

Abstract

We analyze a general equilibrium model in which there is both adverse selection of, and moral hazard by, banks. The regulator can screen banks prior to giving them a licence, audit them ex post to learn the success probability of their projects, and impose capital adequacy requirements. Capital requirements combat moral hazard when the regulator has a strong screening reputation, and they otherwise substitute for screening ability. Crises of confidence can occur only in the latter case, and contrary to conventional wisdom, the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks.

DOI

10.1257/000282805775014254

Volume

95

Issue

5

Pages

1548-1572

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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