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Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital

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  • Lucyna Gornicka

    (University of Amsterdam)

  • Sweder van Wijnbergen

    (University of Amsterdam)

Abstract

We investigate actual capital chosen by banks in presence of capital minimum requirements and ex-post penalties for violating them. The model yields excess capital that is always positive and increases during times of distress in the economy, which is in line with empirical evidence. Next, we show that in presence of ex-post violation penalties the introduction of the conservation buffer under Basel III will not contribute to lowering the pro-cyclicality of capital regulations. The countercyclical buffer proposed under Basel III is then even more desirable as it significantly attenuates fluctuations of actual capital also when the penalties are accounted for.

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File URL: http://papers.tinbergen.nl/13013.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-013/VI/DSF50.

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Date of creation: 14 Jan 2013
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Handle: RePEc:dgr:uvatin:20130013

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Web page: http://www.tinbergen.nl

Related research

Keywords: capital requirements; Basel regulatory framework; excess capital; countercyclical buffer; market discipline;

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  1. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  2. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
  3. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
  4. Viral Acharya & Hamid Mehran & Til Schuermann & Anjan Thakor, 2011. "Robust capital regulation," Staff Reports 490, Federal Reserve Bank of New York.
  5. Itai Agur, 2010. "Capital Requirements and Credit Rationing," DNB Working Papers 257, Netherlands Central Bank, Research Department.
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