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Working Papers, No. 1997-09, 1997
Bank Capital Standards for Market Risk: A Welfare Analysis

The authors propose a simple model that is suitable for evaluating alternative bank capital regulatory proposals for market risk. Their model formalizes the conflict between bank objectives and regulatory goals. Banks' decisions represent a tension between their desire to exploit the deposit-insurance put option and their desire to preserve franchise value. Regulators seek to balance the social value of deposits in mediating transactions against the deadweight costs of failure resolution. Their social welfare criterion is standard: a weighted average agents' utilities.

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