Regulators should encourage troubled banks to raise equity rather than sell assets, according to a working paper published by the Bank of International Settlements.

The paper, authored by Christoph Bertsch (Sveriges Riksbank) and Mike Mariathasan (KU Leuven), sets out a model in which banks tend to have excessive leverage, leaving them vulnerable to crises. The authors’ mathematical model predicts the consequences of equity- and asset-based recapitalisation strategies.

The model assumes that