We provide a new rationale for macroprudential capital regulation by developing a model where banks can privately undertake a costly effort and reduce the probability of adverse shocks to their asset holdings and liquidation (deterioration risk). Low fundamental risk guarantees benevolent...

This paper identifies banking crises dates based on market information embedded in banking stocks. Specifically, we estimate returns on banking indices around the world using a Markov Switching Autoregressive (MS-AR) model to capture regime shift behaviour in both the mean and variance from 1995...