Sustainability of Capital Ratios and Regulator Reputation: Discretionary vs. Binding Legalisation

This paper aims at developing a model of reputation acquisition by the insurer-regulator, in an incompletely informed banking system. Reputation acquisition plays a crucial regulation policy to mitigate the moral hazard problem concerning bank risk-shifting behaviour. I develop results relating the insurer-regulator reputation to the type of legislation regime chosen, the level of capital standard required and actually enforced, and the equilibrium bank asset choice.

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