Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications
AbstractThis paper develops an analytically tractable dynamic general-equilibrium model with a banking system to examine the macroeconomic implications of capital adequacy requirements. In contrast to the hypothesis of a credit crunch, we find that increasing the strength of bank capital requirements does not necessarily reduce the equilibrium quantity of loans, provided that banks have the option to respond to the capital requirements by accumulating more equity instead of cutting back on lending. Accordingly, we show that there is an inverted-U-shaped relationship between CAR and capital accumulation (and consumption). Furthermore, the optimal capital adequacy ratio for social-welfare maximization is lower than that for capital-accumulation maximization. In accordance with general empirical findings, the capital- accumulation maximizing capital adequacy ratio is procyclical with respect to economic conditions. We also find that monetary policy affects the real macroeconomic activities via the so-called bank lending channel, but the effectiveness of monetary policy is weakened by bank capital requirements.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 41056.
Date of creation: 05 Sep 2012
Date of revision:
Banking capital regulation; bank lending channel; the loan-deposit rate;
Other versions of this item:
- Shaw, Ming-fu & Chang, Juin-jen & Chen, Hung-Ju, 2013. "Capital adequacy and the bank lending channel: Macroeconomic implications," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 121-137.
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-09 (All new papers)
- NEP-BAN-2012-09-09 (Banking)
- NEP-CBA-2012-09-09 (Central Banking)
- NEP-DGE-2012-09-09 (Dynamic General Equilibrium)
- NEP-MAC-2012-09-09 (Macroeconomics)
- NEP-MON-2012-09-09 (Monetary Economics)
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