Tseng, T. C., Wu, S., and Liu, M. Y. 1994. Capital Regulation and Bank Asset Portfolio Behavior. NTU Management Review, 5 (1): 061-078
Tseng-Chuang Tseng, Professor, Institute of Management Science, National Chiao-Tung University
Soushan Wu, Professor, Institute of Management Science, National Chiao-Tung University
Mei-Ying Liu, Ph.D. Candidate, Institute of Management Science, National Chiao-Tung University
Abstract
This paper investigates the impact of capital regulation on opportunity set and portfolio behavior of bank. By using mean-variance approach, we develop a model to show that capital regulation deteriorates the investment opportunity of the bank and is an ineffective method to control the possibility of bank insolvency. This reason is that it ignores the different risk preference of individual bank and banks may choose asset portfolio at high risk to retard the efforts of the regulators.
Keywords
Capital regulation Mean-variance approach Opportunity set Portfolio