Jump to ContentJump to Main Navigation
The Risks of Financial Institutions$
Users without a subscription are not able to see the full content.

Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

Show Summary Details
Page of

PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

Pillar 1 versus Pillar 2 under Risk Management

Pillar 1 versus Pillar 2 under Risk Management

(p.377) 8 Pillar 1 versus Pillar 2 under Risk Management
The Risks of Financial Institutions

Loriana Pelizzon

Stephen Schaefer

University of Chicago Press

This chapter explores the consequences of adding Pillar 2 alongside Pillar 1 in terms of bank risk taking and the scale of bank lending. It also concentrates on the interaction between Pillar 1 and Pillar 2 when banks are able to use risk management to cheat in relation to capital requirements. The disciplinary effect of the franchise value vanishes when closure rules allow costless recapitalization. The presence of costs of recapitalization decreases the cost of deposit insurance but increases the probability of default. Without Pillar 2/Prompt Corrective Action (PCA), even when banks' compliance is relatively good (limited cheating), risk-based capital regulation (RBCR) may be effective in the sense that, for higher levels of RBCR, banks do indeed hold higher amounts of capital. Pillar 2/PCA is most effective in decreasing the cost of deposit insurance when compliance is relatively poor.

Keywords:   Pillar 2, Pillar 1, bank risk, bank lending, risk management, capital requirements, recapitalization, capital regulation, deposit insurance, Prompt Corrective Action

Chicago Scholarship Online requires a subscription or purchase to access the full text of books within the service. Public users can however freely search the site and view the abstracts and keywords for each book and chapter.

Please, subscribe or login to access full text content.

If you think you should have access to this title, please contact your librarian.

To troubleshoot, please check our FAQs, and if you can't find the answer there, please contact us.