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Reputation, risk-taking and macroprudential policy

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  • Aikman, David

    ()
    (Bank of England)

  • Nelson, Benjamin

    ()
    (Bank of England)

  • Tanaka, Misa

    ()
    (Bank of England)

Abstract

This 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 Info

Paper provided by Bank of England in its series Bank of England working papers with number 462.

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Length: 40 pages
Date of creation: 07 Oct 2012
Date of revision:
Handle: RePEc:boe:boeewp:0462

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Keywords: Macroprudential policy; credit booms; bank capital regulation;

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References

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  1. Misa Tanaka & Glenn Hoggarth, 2006. "Resolving banking crises - an analysis of policy options," Bank of England working papers, Bank of England 293, Bank of England.
  2. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
  3. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(1), pages 17-34, January.
  4. Javier Bianchi, 2010. "Credit Externalities: Macroeconomic Effects and Policy Implications," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 398-402, May.
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Cited by:
  1. 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.
  2. Christoph Aymanns & J. Doyne Farmer, 2014. "The dynamics of the leverage cycle," Papers 1407.5305, arXiv.org, revised Aug 2014.

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