Optimal Bank Interest Margin Under Capital Regulation: Regret Aversion and Shadow Banking

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Title:	Optimal Bank Interest Margin Under Capital Regulation: Regret Aversion and Shadow Banking
Authors:	Xuelian Li;Jyh-Horng Lin;Fu-Wei Huang
Keywords:	Regret;shadow banking;bank interest margin;capital regulation
Date:	2019-06
Issue Date:	2019-09-13 12:10:18 (UTC+8)
Publisher:	IJIMS
Abstract:	This paper takes a contingent claim approach to the market valuation of a banking firm's equity. A model is presented that explicitly takes into account the following: (i) the bank is regret-averse; (ii) the earning-asset portfolio of the bank includes regular banking loans, default-free liquid assets, and shadow banking wealth management products; and (iii) imposing heightened capital requirements on the bank emerges. We argue that it may not be regretful for the bank to conduct the WMPs, implying that these activities have been increasing over time. Increases in WMPs or capital requirements decrease the bank interest margin, which makes the bank more prone to loan risk-taking, thereby adversely affecting banking stability.
Relation:	International Journal of Information and Management Sciences 30(2), p.169 - 184
DOI:	10.6186%2fIJIMS.201906_30(2).0005
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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