Banking-on-the-Average Rules

Arbeitspapier

In this paper, we argue for a regulatory framework under which a bank’s required level of equity capital depends on the equity capital of its peers. Such bankingon- the-average rules are transparent and could also be combined with the current regulatory framework. In addition, we argue that banking-on-the-average rules ensure the build-up of bank equity capitals in booms and thus avoid excessive leverage. Prudent banks can impose prudency on other banks. In a simple model of a banking system, we show that a banking-on-the-average framework can deliver the socially optimal solution because it induces banks to abstain from gambling. Moreover, it alleviates socially harmful consequences of conventional equity-capital rules, which may induce banks to excessively cut back on lending or liquidate desirable long-term investment projects in downturns.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Working Paper Series ; No. 09/107

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: banking on the average ; equity-capital requirements ; banking system ; banking crisis ; Bankgeschäft ; Bankenliquidität ; Basler Akkord ; Bankenkrise ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gersbach, Hans ; Hahn, Volker
• Event: Veröffentlichung
• (who): ETH Zurich, CER-ETH - Center of Economic Research
• (where): Zurich
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/171550
• Last update: 10.03.2025, 11:42 AM CET