PT  - JOURNAL ARTICLE
AU  - Paul H. Kupiec
TI  - Internal Model-Based Capital Regulation and Bank Risk-Taking Incentives
AID  - 10.3905/jod.2004.412361
DP  - 2004 May 31
TA  - The Journal of Derivatives
PG  - 33--42
VI  - 11
IP  - 4
4099  - https://pm-research.com/content/11/4/33.short
4100  - https://pm-research.com/content/11/4/33.full
AB  - Bank capital requirements set by rigid rules are being replaced by more flexible requirements based on the bank’s internal risk model. But when the government creates a “safety net” for depositors, in the form of a guaranteed payoff on their accounts in the case of bank failure, or an implicit commitment not to allow a bank to fail, it effectively gives the bank a subsidy for taking risk. Since the bank does not have to pay depositors a risk premium for bearing default risk, it can earn a higher return on its risky investments, and will naturally tend to hold riskier assets and less capital. Kupiec sets out the problem explicitly and analyzes it in this article.