Optimal bank interest margins under capital regulation in a call-option utility framework

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Title:	Optimal bank interest margins under capital regulation in a call-option utility framework
Authors:	蔡政言;Tsai, Jeng-Yan
Contributors:	淡江大學國際企業學系
Keywords:	Call-option utility maximization;Call-option equity maximization;Bank interest margins;Capital regulation
Date:	2013-03
Issue Date:	2013-01-30 10:59:12 (UTC+8)
Publisher:	Elsevier BV
Abstract:	This paper examines the optimal bank interest margin under capital regulation when the bank's preference admits an additive call-option representation including both the like of higher equity return and the dislike of higher equity risk. In the call-option utility maximization, an increase in the capital requirement results in an increased amount of loans held by a bank at a reduced margin when loan quality is in distress. We also show that the impact on the bank interest margin from an increase in the capital requirement which ignores the dislike, that we call such behavior call-option equity maximization, leads to significant underestimation. Our results cast doubt on the effectiveness of capital regulation to exert a risk-reducing and return-increasing effect on the bank in particular where loan quality becomes worse, thereby adversely affecting the stability of the banking system.
Relation:	Economic Modelling 31, pp.557-565
DOI:	10.1016/j.econmod.2012.12.024
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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