The Procyclical Effects of Bank Capital Regulation
AbstractWe develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans' probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8897.
Date of creation: Mar 2012
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
- Rafael Repullo & Javier Suarez, 2012. "The Procyclical Effects Of Bank Capital Regulation," Working Papers wp2012_1202, CEMFI.
- Repullo, R. & Suarez, J., 2010. "The Procyclical Effects of Bank Capital Regulation," Discussion Paper 2010-29S, Tilburg University, Center for Economic Research.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-BAN-2012-03-28 (Banking)
- NEP-CBA-2012-03-28 (Central Banking)
- NEP-DGE-2012-03-28 (Dynamic General Equilibrium)
- NEP-MAC-2012-03-28 (Macroeconomics)
- NEP-REG-2012-03-28 (Regulation)
- NEP-RMG-2012-03-28 (Risk Management)
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.:
- Koopman, Siem Jan & Lucas, Andre & Klaassen, Pieter, 2005. "Empirical credit cycles and capital buffer formation," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3159-3179, December.
- Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.