This paper examines the relationship between capital regulation and default risk prediction with the bank interest margin determination under the standard Merton-type and Black-type structural models. The former can be identified as a narrow banking framework while the latter can be identified as a synergy banking framework. In addition, we also introduce a Black-Merton-type structural model in a non-exclusive, narrow-synergy framework. We compare the three structural models for their default prediction capabilities under capital regulation. We find a consistent result from these three models: higher capital requirements lead to lower default risks in the bank's equity return. The ranking of the signifiance effect on default risk is sorted in the following order: Merton-type, Black-Merton-type and Black-type one. This analysis provides important strategic and policy implications for bank managers and regulators.
International Journal of Innovative Computing, Information and Control 10(1), pp.211–231