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Welfare implications of bank capital requirements under dynamic default decisions

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  • Ogawa, Toshiaki

Abstract

I study capital requirements and their welfare implications in a dynamic general equilibrium model of banking. The model is characterized by two features. First, banks choose entry and exit, which allows the number of banks change endogenously. Second, since equity issuance is costly, banks precautionarily hold capital buffers against future liquidity shocks. I find that the optimal capital requirement that maximizes social welfare is larger than 3.5%, and the value sensitively depends on the size of utility households derive from deposit holdings. In a special case without any utility from deposit holdings, I obtain welfare implications that are consistent with Corbae and D’Erasmo (2021a).

Suggested Citation

  • Ogawa, Toshiaki, 2022. "Welfare implications of bank capital requirements under dynamic default decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:dyncon:v:138:y:2022:i:c:s0165188922000653
    DOI: 10.1016/j.jedc.2022.104360
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    More about this item

    Keywords

    Bank capital requirements; Occasionally binding constraints; Endogenous default; Entry and exit; Heterogeneous bank model;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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