¹University of Virginia, Virginia, USA

Correspondence: P Beling, Department of Systems and Information Engineering, University of Virginia, 151 Engineer's Way, Charlottesville, VA 22904, USA

Received 11 January 2008; Accepted 22 June 2009; Published online 4 November 2009.

Abstract

Despite the topic's societal importance and despite progress in bank research, a lack of consensus exists concerning either the desirability of bank regulation or its optimal design. Enforcement of minimum bank capital standards has been shown to enhance bank stability, but also serves as a potential source of incremental costs, some of which are subtle. Such widely ambiguous research results point to the need for theoretical research regarding capital regulation across diverse banking systems. Along the latter lines, consumer bank issues have been generally neglected. This paper theoretically examines the performance implications of misestimating the regulatory capital requirement for a stylised consumer bank. For our stylised consumer bank, we prove that misestimation, irrespective of its direction, results in lower economic profits and, hence, value. Conclusions and implications for future work are drawn.