BIS paper on dynamic prudential regulation

The BIS Working Paper "Dynamic prudential regulation: Is prompt corrective action optimal?" investigates whether reliance on book-value capital is a good policy choice and if PCA is an optimal regulatory approach.

The author uses a variant of DeMarzo and Fishman's (2004) dynamic model of entrepreneurial finance to model interactions between a banker and a regulator. Under hidden choice of risk, private information on returns, limited commitment by the banker and costly liquidation, he first

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