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Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking

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  • : Gianni De Nicolo
  • Andrea Gamba
  • Marcella Lucchetta

Abstract

This paper studies the impact of bank regulation and taxation in a dynamic model with banks exposed to credit and liquidity risk. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain requirement threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. The costs of high capital and liquidity requirements represent a lower bound on the benefits of these regulations in abating systemic risks. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities.

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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wpn12-04.

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Date of creation: 2012
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Handle: RePEc:wbs:wpaper:wpn12-04

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Cited by:
  1. Cristian IONESCU, 2013. "Financial stability between liberalization and regulation," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(9(586)), pages 145-167, September.
  2. Corbae, Dean & D'Erasmo, Pablo, 2014. "Capital requirements in a quantitative model of banking industry dynamics," Working Papers 14-13, Federal Reserve Bank of Philadelphia.
  3. Cordella, Tito & Pienknagura, Samuel, 2013. "Macro prudential policies from a micro prudential angle," Policy Research Working Paper Series 6721, The World Bank.
  4. de la Torre, Augusto & Ize, Alain, 2013. "The foundations of macroprudential regulation : a conceptual roadmap," Policy Research Working Paper Series 6575, The World Bank.
  5. Gunther Capelle-Blancard & Olena Havrylchyk, 2013. "Incidence of Bank Levy and Bank Market Power," Working Papers 2013-21, CEPII research center.
  6. Claudia M. Buch & Björn Hilberg & Lena Tonzer, 2014. "Taxing Banks: An Evaluation of the German Bank Levy," CESifo Working Paper Series 4704, CESifo Group Munich.

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