Risk and Regret Aversions on Optimal Bank Interest Margin under Capital Regulation

doi:10.1016/j.econmod.2012.06.028

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Please use this identifier to cite or link to this item: https://tkuir.lib.tku.edu.tw/dspace/handle/987654321/79687

Title:	Risk and Regret Aversions on Optimal Bank Interest Margin under Capital Regulation
Authors:	Tsai, Jeng-Yan
Contributors:	淡江大學國際企業學系
Keywords:	Interest margin;Capital regulation;Regret aversion;Risk aversion
Date:	2012-11
Issue Date:	2013-01-08 22:48:13 (UTC+8)
Publisher:	Amsterdam: Elsevier BV * North-Holland
Abstract:	This paper examines the bank's optimal loan rate (and thus the bank's interest margin) under more stringent capital regulation when the bank is not only risk-averse but also regret-averse. Risk-averse preferences are characterized by an option-based utility function that includes disutility from the dislike of bank equity risk. Regret-averse preferences feature an option-based utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that an increase in bank capital requirement results in an increased margin under risk aversion dominating regret aversion, whereas it results in a reduced margin under regret aversion dominating risk aversion. The former holds when risk aversion domination stems from increasing risk-averse preference, but not from decreasing regret-averse preference, while the latter holds when regret aversion domination results from either decreasing risk-averse or increasing regret-averse preference. Risk aversion, as such, makes the bank more prudent and less prone to risk-taking, while regret aversion, as such, makes the bank less prudent and more prone to risk-taking.
Relation:	Economic Modelling 29(6), pp.2190–2197
DOI:	10.1016/j.econmod.2012.06.028
Appears in Collections:	[國際企業學系暨研究所] 期刊論文

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