Publication

How Does the Market View Bank Regulatory Capital Forbearance Policies?

Lai, V.S.
; 
Ye, Xiaoxia
Publication Date
17/01/2017
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Keywords
Bank regulatory closure rules, Policy parameter, Bank insolvency, Regulatory forbearance, Market-based closure rules, Financial crises
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Peer-Reviewed
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closedAccess
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Management and Law Publications
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Abstract
During the subprime crisis, the FDIC has shown, once again, laxity in resolving and closing insolvent institutions. Ronn and Verma (1986) call the tolerance level below which a bank closure is triggered the regulatory policy parameter. We derive a model in which we make this parameter stochastic and bank-specific to infer the stock market view of the regulatory capital forbearance value. For 565 U.S. listed banks during 1990 to 2012, the countercyclical forbearance fraction in capital, most substantial in recessions, could represent 17%, on average, of the market valuation of bank equity and could go as high as 100%.
URI
http://hdl.handle.net/10454/14324
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Citation
Lai VS and Y X (2017) How Does the Market View Bank Regulatory Capital Forbearance Policies?
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https://doi.org/10.2139/ssrn.2536017
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Report
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