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Thomas J. RIVERA (HEC Paris) – "Bank Regulation under adverse selection and the Cost of capital" Polytechnique Recruitment
Time: 12:15 pm – 1:30 pm
Date: February 6 , 2019
Place: Room 3001
Thomas J. RIVERA (HEC Paris) – “Bank Regulation under adverse selection and the Cost of capital” Polytechnique Recruitment
This paper studies a model of bank capital regulation whereby banks have private information regarding the value of their existing assets. Raising capital (e.g. equity) is costly for banks whose assets are undervalued by the market, leading them to forgo new investments when capital requirements are too high. In this case, the regulator faces a tradeoff between minimizing the liability that bank failure imposes on society and inducing banks to invest in valuable projects. While there exist capital regulations that induce the bank to reveal its private information to the market, we show that pooling the bank’s information though a simple capital requirement can still be optimal. We characterize the optimal capital regulations as a function of the strength and opacity of the banking sector and the resulting policy implications.