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Bank Capital Regulation in General Equilibrium

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  • Gary Gorton
  • Andrew Winton

Abstract

We study whether the socially optimal level of stability of the banking system can be implemented with regulatory capital requirements in a multi-period general equilibrium model of banking. We show that: (i) bank capital is costly because of the unique liquidity services provided by demand deposits, so a bank regulator may optimally choose to have a risky banking system; (ii) even if the regulator prefers more capital in the system, the regulator is constrained by the private cost of bank capital, which determines whether bank shareholders will agree to meet capital requirements rather than exit the industry.

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Bibliographic Info

Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 17-95.

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Handle: RePEc:fth:pennfi:17-95

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  1. Pringle, John J, 1974. "The Capital Decision in Commercial Banks," Journal of Finance, American Finance Association, vol. 29(3), pages 779-95, June.
  2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  3. 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, issue Sum, pages 34-39.
  4. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
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  7. Sharpe, William F., 1978. "Bank Capital Adequacy, Deposit Insurance and Security Values," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(04), pages 701-718, November.
  8. Lam, Chun H & Chen, Andrew H, 1985. " Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments," Journal of Finance, American Finance Association, vol. 40(2), pages 563-75, June.
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  14. Keeley, Michael C. & Furlong, Frederick T., 1990. "A reexamination of mean-variance analysis of bank capital regulation," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 69-84, March.
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  16. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
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  18. Peltzman, Sam, 1970. "Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 1-26, Jan.-Feb..
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Citations

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Cited by:
  1. Donsyah Yudistira, 2002. "The Impact of Bank Capital Requirements in Indonesia," Finance 0212002, EconWPA, revised 18 May 2003.
  2. W. Bolt & A.F. Tieman, 2001. "Banking competition, risk and regulation," DNB Staff Reports (discontinued) 70, Netherlands Central Bank.
  3. cho, hyejin, 2014. "bank capital regulation model," MPRA Paper 54365, University Library of Munich, Germany.
  4. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA.
  5. cho, hyejin, 2014. "Macro Micro Model with a Post-keynesian Perspective in the banking industry," MPRA Paper 56119, University Library of Munich, Germany.
  6. Goetz von Peter, 2004. "Asset prices and banking distress: a macroeconomic approach," BIS Working Papers 167, Bank for International Settlements.
  7. Eichberger, Jürgen & Summer, Martin, 2004. "Bank Capital, Liquidity and Systemic Risk," Sonderforschungsbereich 504 Publications 04-45, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  8. Hyun, Jung-Soon & Rhee, Byung-Kun, 2011. "Bank capital regulation and credit supply," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 323-330, February.
  9. Arturo Bris & Salvatore Cantale, 1998. "Bank Capital Requirements and Managerial Self-Interest," Yale School of Management Working Papers ysm105, Yale School of Management, revised 01 Aug 2000.
  10. David Marshall & Subu Venkataraman, 1997. "Bank capital standards for market risk: a welfare analysis," Working Paper Series, Issues in Financial Regulation WP-97-09, Federal Reserve Bank of Chicago.
  11. G. Chiesa, 2001. "Competition and Regulation in Banking," Working Papers 397, Dipartimento Scienze Economiche, Universita' di Bologna.
  12. Chortareas, Georgios E. & Girardone, Claudia & Ventouri, Alexia, 2012. "Bank supervision, regulation, and efficiency: Evidence from the European Union," Journal of Financial Stability, Elsevier, vol. 8(4), pages 292-302.
  13. Bris, Arturo & Cantale, Salvatore, 2004. "Bank capital requirements and managerial self-interest," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(1), pages 77-101, February.
  14. W. Bolt & A.F. Tieman, 2001. "When Basle II doesn't work: Contingency Rules versus Fixed Requirements," WO Research Memoranda (discontinued) 681, Netherlands Central Bank, Research Department.
  15. repec:onb:oenbwp:y::i:87:b:1 is not listed on IDEAS

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