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Abstract
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We analyze a bank that operates under the Basel credit and market risk requirements and that maximizes its value through recapitalizations, dividends, and liquid asset investments. According to our model, the main effect of the market risk requirement is to curtail excessive investments when banks have high buffer capital. This triggers the bank to pay dividend at a lower buffer capital, which in some cases increases the bank's default probability. In this sense the market risk requirement is inefficient. |
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