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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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5244.

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Date of creation: Aug 1995
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Handle: RePEc:nbr:nberwo:5244

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Citations

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Cited by:
  1. G. Chiesa, 2001. "Competition and Regulation in Banking," Working Papers 397, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance, EconWPA 0411034, EconWPA.
  3. Arturo Bris & Salvatore Cantale, 1998. "Bank Capital Requirements and Managerial Self-Interest," Yale School of Management Working Papers, Yale School of Management ysm105, Yale School of Management, revised 01 Aug 2000.
  4. David Marshall & Subu Venkataraman, 1997. "Bank capital standards for market risk: a welfare analysis," Working Paper Series, Issues in Financial Regulation, Federal Reserve Bank of Chicago WP-97-09, Federal Reserve Bank of Chicago.
  5. Alexander F. Tieman & Wilko Bolt, 2004. "Banking Competition, Risk, and Regulation," IMF Working Papers 04/11, International Monetary Fund.
  6. von Peter, Goetz, 2009. "Asset prices and banking distress: A macroeconomic approach," Journal of Financial Stability, Elsevier, Elsevier, vol. 5(3), pages 298-319, September.
  7. cho, hyejin, 2014. "bank capital regulation model," MPRA Paper 54409, University Library of Munich, Germany.
  8. Donsyah Yudistira, 2002. "The Impact of Bank Capital Requirements in Indonesia," Finance, EconWPA 0212002, EconWPA, revised 18 May 2003.
  9. Eichberger, Jürgen & Summer, Martin, 2004. "Bank Capital, Liquidity and Systemic Risk," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim 04-45, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  10. cho, hyejin, 2014. "Macro Micro Model with a Post-keynesian Perspective in the banking industry," MPRA Paper 56119, University Library of Munich, Germany.
  11. Hyun, Jung-Soon & Rhee, Byung-Kun, 2011. "Bank capital regulation and credit supply," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 323-330, February.
  12. W. Bolt & A.F. Tieman, 2001. "When Basle II doesn't work: Contingency Rules versus Fixed Requirements," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 681, Netherlands Central Bank, Research Department.
  13. Bris, Arturo & Cantale, Salvatore, 2004. "Bank capital requirements and managerial self-interest," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 44(1), pages 77-101, February.
  14. repec:onb:oenbwp:y::i:87:b:1 is not listed on IDEAS
  15. Chortareas, Georgios E. & Girardone, Claudia & Ventouri, Alexia, 2012. "Bank supervision, regulation, and efficiency: Evidence from the European Union," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(4), pages 292-302.

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