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Implications of Bank Regulation for Credit Intermediation and Bank Stability: A Dynamic Perspective

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  • Bucher, Monika
  • Dietrich, Diemo
  • Hauck, Achim

Abstract

Business cycles imply liquidity risks for banks. This paper explores how these risks influence bank lending over the cycle. With forward-looking banks, lending cycles, credit booms and busts, or suppressed and highly fragile bank systems can emerge, depending on the magnitude of liquidity risks. In this context, regulatory stability-enhancing measures have some unpleasant effects on bank lending. Imposing countercyclical capital adequacy ratio may amplify procyclicality or result in disintermediation, when liquidity risks are only moderate and financial stability is barely a threat. Adopting a regulatory margin call eliminates failures but stops lending for larger liquidity risks whereas a liquidity ratio might be a way to reduce risk-taking without fully hampering credit intermediation. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79792.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79792

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  1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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