Cyclical Adjustment of Capital Requirements: A Simple Framework
AbstractWe present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive 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 9008.
Date of creation: Jun 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:
- Repullo, Rafael, 2013. "Cyclical adjustment of capital requirements: A simple framework," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 608-626.
- Rafael Repullo, 2012. "Cyclical Adjustment Of Capital Requirements A Simple Framework," Working Papers wp2012_1205, CEMFI.
- 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-2012-06-25 (All new papers)
- NEP-BAN-2012-06-25 (Banking)
- NEP-MAC-2012-06-25 (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.:
- Repullo, Rafael & Suarez, Javier, 2003.
"Loan Pricing Under Basel Capital Requirements,"
CEPR Discussion Papers
3917, C.E.P.R. Discussion Papers.
- Repullo, Rafael, 2005.
"Liquidity, Risk Taking, and the Lender of Last Resort,"
826, University Library of Munich, Germany.
- Rafael Repullo, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
- Rafael Repullo, 2005. "Liquidity, Risk-Taking, And The Lender Of Last Resort," Working Papers wp2005_0504, CEMFI.
- Repullo, Rafael, 2005. "Liquidity, Risk-Taking and the Lender of Last Resort," CEPR Discussion Papers 4967, C.E.P.R. Discussion Papers.
- Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
- Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2009.
"Mitigating The Procyclicality Of Basel Ii,"
- Repullo, Rafael & Saurina, Jesús & Trucharte, Carlos, 2009. "Mitigating the Procyclicality of Basel II," CEPR Discussion Papers 7382, C.E.P.R. Discussion Papers.
- Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II," Banco de Espaï¿½a Working Papers 1028, Banco de Espa�a.
- Anil Kashyap & Jeremy C. Stein, 2004. "Cyclical implications of the Basel II capital standards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 18-31.
- Holmström, Bengt & Tirole, Jean, 1994.
"Financial Intermediation, Loanable Funds and the Real Sector,"
IDEI Working Papers
40, Institut d'Économie Industrielle (IDEI), Toulouse.
- Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
- Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
- Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
- Andrei Shleifer & Robert W. Vishny, 2009.
NBER Working Papers
14943, National Bureau of Economic Research, Inc.
- Repullo, Rafael & Suarez, Javier, 2012.
"The Procyclical Effects of Bank Capital Regulation,"
CEPR Discussion Papers
8897, C.E.P.R. Discussion Papers.
- 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.
- Repullo, R. & Suarez, J., 2010. "The Procyclical Effects of Bank Capital Regulation," Discussion Paper 2010-29S, Tilburg University, Center for Economic Research.
- Rafael Repullo & Javier Suarez, 2012. "The Procyclical Effects Of Bank Capital Regulation," Working Papers wp2012_1202, CEMFI.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
- Stefan Arping, 2014. "Does Competition make Banks more Risk-seeking?," Tinbergen Institute Discussion Papers 14-059/IV, Tinbergen Institute.
- Gete, Pedro & Tiernan, Natalie, 2014. "Lending Standards and Countercyclical Capital Requirements under Imperfect Information," MPRA Paper 54486, University Library of Munich, Germany.
- Aptus, Elias & Britz, Volker & Gersbach, Hans, 2014. "On the economics of crisis contracts," CFS Working Paper Series 453, Center for Financial Studies (CFS).
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.