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Risky Bank Lending and Optimal Capital Adequacy Regulation

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Author Info

  • Jaromir Benes
  • Michael Kumhof

Abstract

We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending. Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth. The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses. Their main response is to raise lending rates to rebuild net worth. Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare. But the gains from eliminating limited liability and moral hazard would be an order of magnitude larger.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/130.

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Length: 27
Date of creation: 01 Jun 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/130

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Keywords: Banks; Corporate sector; Economic models; Moral hazard; capital adequacy; banking; capital goods; bankers; bank capital; bank lending; capital losses; capital adequacy ratio; deposit insurance; banking sector; bank balance sheets; bank equity; prudential regulation; banker; banking sectors; capital stock; bank deposits; capital regulation; bankrupt; state bank; bank loans; bank capital regulation; bank runs; nominal price; exogenous shocks; bank interest rate; indexation; consumer price index; private capital; bank lending rates; bank holdings; banking system; bank interest; banking systems; bankruptcies; capital adequacy ratios; capital income; credit policy; government securities; inflation rate; bank funding; dividend policy; corporate loans; government bonds; recapitalization; bank profits; nominal capital;

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References

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Citations

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Cited by:
  1. Tayler, William & Zilberman, Roy, 2014. "Macroprudential Regulation and the Role of Monetary Policy," Dynare Working Papers 37, CEPREMAP.
  2. František Brazdik & Michal Hlavacek & Aleš Marsal, 2012. "Survey of Research on Financial Sector Modeling within DSGE Models: What Central Banks Can Learn from It," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 62(3), pages 252-277, July.
  3. Joshua Ioji Konov, 2013. "Enhancing Markets (i.e. Economies) Transmissionability to Optimize Monetary Policies’ Effect," EY International Congress on Economics I (EYC2013), October 24-25, 2013, Ankara, Turkey, Ekonomik Yaklasim Association 205, Ekonomik Yaklasim Association.
  4. Jaromir Benes & Michael Kumhof & Douglas Laxton, 2014. "Financial Crises in DSGE Models: Selected Applications of MAPMOD," IMF Working Papers 14/56, International Monetary Fund.

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