Bank Capital, Liquidity and Systemic Risk
AbstractWe analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation on systemic risk. In particular we can analyze the impact of regulation on contagious defaults arising from mutual credit relations. We show that the impact of capital adequacy on systemic stability is ambiguous and that systemic risk might actually increase as a consequence of imposing capital constraints on banks. Furthermore we analyze the indirect consequences of capital adequacy regulation that are transmitted to the real economy by their impact on equilibrium interbank rates and thus the opportunity costs of liquidity within the banking system.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 87.
Date of creation: 03 May 2004
Date of revision:
Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
Other versions of this item:
- JÃ¼rgen Eichberger & Martin Summer, 2005. "Bank Capital, Liquidity, and Systemic Risk," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 547-555, 04/05.
- Eichberger, JÃ¼rgen & Summer, Martin, 2004. "Bank Capital, Liquidity and Systemic Risk," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, UniversitÃ¤t Mannheim;Sonderforschungsbereich 504, University of Mannheim 04-45, Sonderforschungsbereich 504, UniversitÃ¤t Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- 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
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dimitrios P Tsomocos & Charles A.E. Goodhart, 2003.
"A Model to Analyse Financial Fragility,"
Economics Series Working Papers
2003-FE-13, University of Oxford, Department of Economics.
- Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A model to analyse financial fragility," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24703, London School of Economics and Political Science, LSE Library.
- Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2003. "A Model to Analyse Financial Fragility," OFRC Working Papers Series, Oxford Financial Research Centre 2003fe13, Oxford Financial Research Centre.
- Gary Gorton & Andrew Winton, 1995.
"Bank Capital Regulation in General Equilibrium,"
NBER Working Papers
5244, National Bureau of Economic Research, Inc.
- Gary Gorton & Andrew Winton, . "Bank Capital Regulation in General Equilibrium," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 17-95, Wharton School Rodney L. White Center for Financial Research.
- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, INFORMS, vol. 47(2), pages 236-249, February.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006.
"Risk Assessment for Banking Systems,"
Management Science, INFORMS,
INFORMS, vol. 52(9), pages 1301-1314, September.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "Risk Assessment for Banking Systems," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 79, Oesterreichische Nationalbank (Austrian Central Bank).
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
- Anil Kashyap & Jeremy C. Stein, 2004. "Cyclical implications of the Basel II capital standards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 18-31.
- Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991.
"Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups,"
The Quarterly Journal of Economics, MIT Press,
MIT Press, vol. 106(1), pages 33-60, February.
- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
- Itai Agur, 2014.
"Bank Risk Within and Across Equilibria,"
IMF Working Papers
14/116, International Monetary Fund.
- Itai Agur, 2011. "Bank Risk within and across Equilibria," DNB Working Papers, Netherlands Central Bank, Research Department 305, Netherlands Central Bank, Research Department.
- Gerhard Illing, 2007. "Financial Stability and Monetary Policy – A Framework," CESifo Working Paper Series 1971, CESifo Group Munich.
- David VanHoose, 2011.
"Systemic Risks and Macroprudential Bank Regulation: A Critical Appraisal,"
NFI Policy Briefs
2011-PB-04, Indiana State University, Scott College of Business, Networks Financial Institute.
- VanHoose, David, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, Capco Institute, vol. 33, pages 45-60.
- Krause, Andreas & Giansante, Simone, 2012. "Interbank lending and the spread of bank failures: A network model of systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 583-608.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Markus Knell and Helmut Stix).
If references are entirely missing, you can add them using this form.