Reputation, risk-taking and macroprudential policy
AbstractThis paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. Unprofitable banks have strong incentives to invest in risky assets and generate inefficient credit booms when macroeconomic fundamentals are good in order to signal high ability. We show that across-the-system countercyclical capital requirements that deter credit booms are constrained optimal when fundamentals are within an intermediate range. We also show that when fundamentals are deteriorating, a public announcement of that fact can itself play a powerful role in preventing inefficient credit booms, providing an additional channel through which macroprudential policies can improve outcomes.
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Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 462.
Length: 40 pages
Date of creation: 07 Oct 2012
Date of revision:
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More information through EDIRC
Macroprudential policy; credit booms; bank capital regulation;
Find related papers by JEL classification:
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
- NEP-BAN-2012-10-13 (Banking)
- NEP-CBA-2012-10-13 (Central Banking)
- NEP-CTA-2012-10-13 (Contract Theory & Applications)
- NEP-MAC-2012-10-13 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Javier Bianchi, 2010. "Credit Externalities: Macroeconomic Effects and Policy Implications," American Economic Review, American Economic Association, vol. 100(2), pages 398-402, May.
- Misa Tanaka & Glenn Hoggarth, 2006. "Resolving banking crises - an analysis of policy options," Bank of England working papers 293, Bank of England.
- Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
- Mehmet Fatih Ekinci & Gazi Kabas & Enes Sunel, 2013.
"End-Point Bias in Trend-Cycle Decompositions: An Application to the Real Exchange Rates of Turkey,"
Central Bank Review,
Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(3), pages 61-71.
- M. Fatih Ekinci & Gazi Kabas & Enes Sunel, 2013. "End-Point Bias in Trend-Cycle Decompositions : An Application to the Real Exchange Rates of Turkey," Working Papers 1316, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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