The Von Neumann–Morgenstern Curve and Bank Capital Adequacy Penalties—An Empirical Analysis

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

Dear Author(s),

My comments:

1. In the introductory part, there is no clearer wording of the scientific problem and the question of the scientific problem raised by the authors of the articles. This position must be discussed and included in the introduction.

2. Abstract also misses the scientific value highlighted by the author on this topic, which would be important for the international audience to know.

3. The literature review lacks a systematic-problematic analysis of the phenomenon; the current text contains just a historical overview.

4. I would like the author(s) to justify the application of this methodology; its significance in the field of other methodologies.  Why is this what you're doing in your study?

5. The type and criteria of the sampling of participants should be justified.

6. The conclusions should be broader and present the fundamental findings in more detail.

 Anyway, this study is interesting. Methodological inaccuracies and errors should be corrected.

Sincerely.

Author Response

Dear Sir/Madam Thank you very much for reviewing the paper, please find my responses in red underneath each of your review points: 1. In the introductory part, there is no clearer wording of the scientific problem and the question of the scientific problem raised by the authors of the articles. This position must be discussed and included in the introduction. This has been amended and described in the last paragraph of the introduction, a new reference added  - Broz, Pace, Garhir, Draper and Cavagnetto (2023) 2. Abstract also misses the scientific value highlighted by the author on this topic, which would be important for the international audience to know. This has been specifically added in the seventh line of the abstract in the amended section in red. 3. The literature review lacks a systematic-problematic analysis of the phenomenon; the current text contains just a historical overview. The literature review has been changed to a thematic analysis and divided into Theoretical Frameworks, Empirical Studies and Regulatory Perspectives. 4. I would like the author(s) to justify the application of this methodology; its significance in the field of other methodologies.  Why is this what you're doing in your study? Section 2 explains the application of the methodology and specifically in reference to the work of Gary Becker (1968) 5. The type and criteria of the sampling of participants should be justified. This is now explained in section 2.1 Demographics and Empirical Testing in the first paragraph. 6. The conclusions should be broader and present the fundamental findings in more detail. The second paragraph of the Conclusions has now been expanded to look at the wider context of the Conclusions particularly in relation to the Allais and Ellsberg paradoxes and more recent bank failures. Respectfully Yours   Dr. Thomas Draper Prof. Stefano Cavagnetto

Reviewer 2 Report

Comments and Suggestions for Authors

I am pleased to having been asked to read this interesting paper on "The Von Neumann-Morgenstern Curve and Bank Capital Adequacy Penalties - An Empirical Analysis".  The author/s herein assesses the results of an empirical testing of a model based on the Von Neumann-Morgenstern utility function  and consequently proposes that this model be used as a basis for standardising capital adequacy  limit infraction penalties on an international level to prevent such arbitrage. The abstract effectively highlights the central issues surrounding banking regulation and the potential for regulatory arbitrage. Some sentences are a bit lengthy and could be broken down for clarity and ease of understanding. For instance, consider dividing the sentence starting with "The current system..." into two or more sentences to enhance readability. There are minor grammatical issues and awkward phrasings in some parts of the abstract. For example, consider revising the sentence beginning with "Lastly, practically speaking..." for smoother syntax.

The introduction effectively sets the stage for the research by identifying the gaps in current regulatory practices and introducing the proposed solution. However, consider separating the discussion on penalty levels and inspection frequency into distinct paragraphs for improved readability. When mentioning the utility function developed by Von Neumann and Morgenstern, it may be helpful to provide a brief explanation of this concept for readers who may not be familiar with it. This would ensure that all readers can follow the logic of the argument. Also, it is not clear what are the researchers aiming to achieve by testing this function empirically?

The literature review provides a comprehensive examination of various theoretical frameworks and empirical studies related to capital adequacy regulation, risk perception, and decision-making in different domains. Consider organizing the literature review into subsections based on thematic categories, such as theoretical frameworks (e.g., utility theory), empirical studies in different domains (e.g., consumer behavior, marketing, engineering), and regulatory perspectives (e.g., Basel III). Some sentences are complex and could be simplified for clarity. Break down lengthy sentences into smaller units to enhance readability. Additionally, clearly articulate the main findings and implications of each cited study to highlight their relevance to the research topic.

The Methodology is well written and replicable and the results, conclusion and discussion triangulate with the rest of the article. However, the conclusion is clear and succinct, but it could benefit from further elaboration on the implications of the empirical findings for regulatory practices. Specifically, discuss how the similarity in risk aversion between bankers and non-bankers impacts regulatory policies and the effectiveness of self-regulation. Consider integrating the conclusion with the broader literature on capital adequacy regulation and risk perception. Relate the empirical findings to existing theoretical frameworks or empirical studies discussed in the literature review to provide context and support for the conclusions drawn. Moreover, the authors could offer specific policy recommendations based on the empirical findings and their implications for regulatory practices. Highlight how standardizing capital adequacy limit infringement penalties based on the Von Neumann-Morgenstern utility function can mitigate regulatory arbitrage and enhance the stability of the banking sector.

Comments on the Quality of English Language

Needs some improvements as suggested.

Author Response

Dear Sir/Madam Thank you very much for reviewing the paper and your insightful comments.  We have amended the paper in red in response, please also see our specific replies in red to the issues you mention below each paragraph of your review.   I am pleased to having been asked to read this interesting paper on "The Von Neumann-Morgenstern Curve and Bank Capital Adequacy Penalties - An Empirical Analysis".  The author/s herein assesses the results of an empirical testing of a model based on the Von Neumann-Morgenstern utility function  and consequently proposes that this model be used as a basis for standardising capital adequacy  limit infraction penalties on an international level to prevent such arbitrage. The abstract effectively highlights the central issues surrounding banking regulation and the potential for regulatory arbitrage. Some sentences are a bit lengthy and could be broken down for clarity and ease of understanding. For instance, consider dividing the sentence starting with "The current system..." into two or more sentences to enhance readability. There are minor grammatical issues and awkward phrasings in some parts of the abstract. For example, consider revising the sentence beginning with "Lastly, practically speaking..." for smoother syntax. These sentences have been reworded for smoother syntax and are shown in red in the returned copy The introduction effectively sets the stage for the research by identifying the gaps in current regulatory practices and introducing the proposed solution. However, consider separating the discussion on penalty levels and inspection frequency into distinct paragraphs for improved readability. When mentioning the utility function developed by Von Neumann and Morgenstern, it may be helpful to provide a brief explanation of this concept for readers who may not be familiar with it. This would ensure that all readers can follow the logic of the argument. Also, it is not clear what are the researchers aiming to achieve by testing this function empirically? The concept of  Von Neumann and Morgenstern has been mentioned in the Abstract, and introduced in a new section in the third paragraph of the Introduction  and a new separate paragraph at the start of the literature review and also in section 1.2 Empirical Studies (particularly the first 3 paragraphs) The literature review provides a comprehensive examination of various theoretical frameworks and empirical studies related to capital adequacy regulation, risk perception, and decision-making in different domains. Consider organizing the literature review into subsections based on thematic categories, such as theoretical frameworks (e.g., utility theory), empirical studies in different domains (e.g., consumer behavior, marketing, engineering), and regulatory perspectives (e.g., Basel III). Some sentences are complex and could be simplified for clarity. Break down lengthy sentences into smaller units to enhance readability. Additionally, clearly articulate the main findings and implications of each cited study to highlight their relevance to the research topic. The literature review has been changed to a thematic analysis and divided into Theoretical Frameworks, Empirical Studies and Regulatory Perspectives. Complex sentences have been reviewed and shortened and the clarity of the subject checked. The Methodology is well written and replicable and the results, conclusion and discussion triangulate with the rest of the article. However, the conclusion is clear and succinct, but it could benefit from further elaboration on the implications of the empirical findings for regulatory practices. Specifically, discuss how the similarity in risk aversion between bankers and non-bankers impacts regulatory policies and the effectiveness of self-regulation. Consider integrating the conclusion with the broader literature on capital adequacy regulation and risk perception. Relate the empirical findings to existing theoretical frameworks or empirical studies discussed in the literature review to provide context and support for the conclusions drawn. Moreover, the authors could offer specific policy recommendations based on the empirical findings and their implications for regulatory practices. Highlight how standardizing capital adequacy limit infringement penalties based on the Von Neumann-Morgenstern utility function can mitigate regulatory arbitrage and enhance the stability of the banking sector. The second paragraph of the Conclusions has now been expanded to look at the wider context of the Conclusions particularly in relation to implications for self-governance in capital adequacy regulation and the Allais and Ellsberg paradoxes and the context of more recent bank failures. Respectfully Yours   Dr. Thomas Draper Prof. Stefano Cavagnetto  

Reviewer 3 Report

Comments and Suggestions for Authors

1.       The structure of the survey is not explained in the text. The author needs to properly explain the choices made in terms of questions and the literature on which he based himself for this purpose.

2.       Regarding the selection process of bankers and non-bankers, the information given is scarce. From which countries, size of the banks... If the sample is representative of the population...

3.       What are the implications of Allais and Ellsberg paradox in the conclusions obtained by the author?

Author Response

Dear Sir/Madam Thank you very much for reviewing the paper we take note of your points and the following amendments have been made marked in Red in the text. 1. The structure of the survey is not explained in the text. The author needs to properly explain the choices made in terms of questions and the literature on which he based himself for this purpose. This is now explained in Section 2.1 Demographics and Empirical Testing, in both a new starting paragraph and the following paragraphs in this section. 2. R2. Regarding the selection process of bankers and non-bankers, the information given is scarce. From which countries, size of the banks... If the sample is representative of the population.  This is now explained in Section 2.1 Demographics and Empirical Testing, in the first paragraph and also the last of that section. 3.       What are the implications of Allais and Ellsberg paradox in the conclusions obtained by the author? This is discussed in a new second paragraph of Section 5 Conclusions and Limitations Respectfully Yours   Dr. Thomas Draper Prof. Stefano Cavagnetto  

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

The authors have taken on board my criticisms of the methodology and the structure of the paper and have revised the paper. It is now suitable for publication.

Sincerely.