Skip to Main Content

Economic Quarterly

Summer 2001

Regulating Bank Capital Structure to Control Risk

Edward S. Prescott

Since the Basle capital regulations of 1988 and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, capital requirements have been a critical part of bank regulation. These requirements limit leverage by requiring and encouraging banks to hold minimum levels of equity. This article uses the agency theory of corporate finance to study how capital requirements control bank risk taking. It finds that existing capital regulations can be made more effective if augmented with financial instruments like warrants or convertible debt.

Subscribe to Economic Quarterly

Receive an email notification when Economic Quarterly is posted online:

Subscribe to Economic Quarterly

By submitting this form you agree to the Bank's Terms & Conditions and Privacy Notice.

Phone Icon Contact Us

Lisa Davis (804) 697-8179