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Bank Capital, Liquidity and Systemic Risk

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  • Eichberger, Jürgen

    ()
    (Sonderforschungsbereich 504)

  • Summer, Martin

    (Oesterreichische Nationalbank)

Abstract

We 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.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-45.

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Length: 13 pages
Date of creation: 24 Nov 2004
Date of revision:
Handle: RePEc:xrs:sfbmaa:04-45

Note: We would like to thank Eva Terberger for helpful discussions in the early stages
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  1. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2003. "A Model to Analyse Financial Fragility," OFRC Working Papers Series 2003fe13, Oxford Financial Research Centre.
  2. Gary Gorton & Andrew Winton, 1995. "Bank Capital Regulation in General Equilibrium," NBER Working Papers 5244, National Bureau of Economic Research, Inc.
  3. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
  4. Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "Risk Assessment for Banking Systems," Working Papers 79, Oesterreichische Nationalbank (Austrian Central Bank).
  5. 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.
  6. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  7. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Itai Agur, 2011. "Bank Risk within and across Equilibria," DNB Working Papers 305, Netherlands Central Bank, Research Department.
  2. VanHoose, David, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, vol. 33, pages 45-60.
  3. Gerhard Illing, 2007. "Financial Stability and Monetary Policy – A Framework," CESifo Working Paper Series 1971, CESifo Group Munich.
  4. 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.

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