Carsten Nielsen

We investigate, in a model of perfectly competitive banks and a lower bound on the deposit rate that these banks may offer, the idea that, as a result of financial innovation, capital adequacy requirements may become ineffective in preventing banks from investing in risky assets which are, from the point of view of society, inefficient. We interpret this as one possible explanation of the seemingly repeated failure of the Basel accords to induce a desired level of prudence by the banks. Keywords: Bank regulation, capital requirements, moral hazard, financial innovation. JEL Classification: D43, D82, G21, G28.