Credit allocation, capital requirements and output
AbstractWe show how banks’ excessive risk-taking, stemming from informational asymmetries in loan markets, can lead to an excessive output loss when a recession starts. Risk-based capital requirements can alleviate the output loss by reducing excessive risk-taking in ‘normal’ times. Model simulations suggest that the differentiation of risk-weights in the Basel framework might be further increased in order to take full advantage of the allocational effects of capital requirements. Our analysis also provides a new rationale for the countercyclical elements of capital requirements.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 17/2010.
Length: 35 pages
Date of creation: 01 Dec 2010
Date of revision:
Publication status: Forthcoming as Jokivuolle, Esa, Ilkka Kiema and Timo Vesala, 'Credit allocation, capital requirements and output' in Journal of Financial Services Research .
bank regulation; Basel III; capital requirements; credit risk; crises; procyclicality;
Find related papers by JEL classification:
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- 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-2011-01-03 (All new papers)
- NEP-BAN-2011-01-03 (Banking)
- NEP-REG-2011-01-03 (Regulation)
- NEP-RMG-2011-01-03 (Risk Management)
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