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Capital requirements and business cycles with credit market imperfections

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  • Agénor, P.-R.
  • Alper, K.
  • Pereira da Silva, L.

Abstract

The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. Key features of the model are that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default, and excess capital generates benefits in terms of reduced regulatory scrutiny. Basel I and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Simulations of supply and demand shocks show that, depending on the elasticity that relates the repayment probability to the capital-loan ratio, a Basel II-type regime may be less procyclical than a Basel I-type regime.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5151.

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Date of creation: 01 Dec 2009
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Handle: RePEc:wbk:wbrwps:5151

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Keywords: Banks&Banking Reform; Debt Markets; Access to Finance; Economic Theory&Research; Emerging Markets;

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Cited by:
  1. Luiz Awazu Pereira da Silva & Ricardo Eyer Harris, 2012. "Sailing through the Global Financial Storm: Brazil's recent experience with monetary and macroprudential policies to lean against the financial cycle and deal with systemic risks," Working Papers Series 290, Central Bank of Brazil, Research Department.
  2. Luiz A. Pereira da Silva & Adriana Soares Sales & Wagner Piazza Gaglianone, 2012. "Financial Stability in Brazil," Working Papers Series 289, Central Bank of Brazil, Research Department.
  3. Pierre-Richard AGENOR & Luiz A. PEREIRA DA SILVA, 2011. "Macroeconomic Stability, Financial Stability, and Monetary Policy Rules," Working Papers P29, FERDI.
  4. Pierre-Richard Agénor & K. Alper & Luiz A. Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers Series 237, Central Bank of Brazil, Research Department.
  5. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2011. "Macroprudential Regulation and the Monetary Transmission Mechanism," Working Papers Series 254, Central Bank of Brazil, Research Department.
  6. Tabak, Benjamin M. & Takami, Marcelo & Rocha, Jadson M.C. & Cajueiro, Daniel O. & Souza, Sergio R.S., 2014. "Directed clustering coefficient as a measure of systemic risk in complex banking networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 211-216.
  7. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.
  8. M. Falagiarda & A. Saia, 2013. "Credit, Endogenous Collateral and Risky Assets: A DSGE Model," Working Papers wp916, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2012. "Sudden Floods, Prudential Regulation and Stability in an Open Economy," Working Papers Series 267, Central Bank of Brazil, Research Department.
  10. A. R. Fonseca & F. González & L. Pereira da Silva, 2010. "Cyclical Effects of Bank Capital Buffers with Imperfect Credit Markets: international evidence," Working Papers Series 216, Central Bank of Brazil, Research Department.
  11. Otaviano Canuto, 2011. "How Complementary Are Prudential Regulation and Monetary Policy?," World Bank Other Operational Studies 10089, The World Bank.
  12. Canuto, Otaviano, 2011. "How Complementary Are Prudential Regulation and Monetary Policy?," World Bank - Economic Premise, The World Bank, issue 60, pages 1-7, June.
  13. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.

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