Countercyclical capital regulation: should bank regulators use rules or discretion?
One of the key features of the U.S. economy’s slow recovery from the 2007-09 recession has been abnormally low bank lending to households and corporate businesses. While demand for loans may be sluggish, much of the slowdown may stem from banks’ reluctance to lend. Before resuming normal lending activity, banks must first replenish capital levels that were depleted during the financial crisis. ; Many analysts have pointed out that existing bank capital regulation can contribute to banks’ reluctance to lend during recessions and into recoveries. That is, the capital requirements have a procyclical effect on lending. They make it more difficult for banks to finance loans in recessions when they would help stimulate the economy. ; In response to this problem, the Dodd-Frank Financial Reform and Consumer Protection Act of 2010 (Dodd-Frank) and the recent revision of the international Basel Accord, Basel III, mandated changes to make capital requirements countercyclical. The changes should counteract the procyclical effect of capital regulation by requiring banks to hold higher capital ratios during booms. Thus, during downturns banks would be in a better position to absorb rising losses and sustain lending to support economic growth. ; Whether countercyclical capital requirements will provide more lending in recessions depends on how they are implemented. Yet, little discussion among policymakers has focused on implementation. ; Kowalik examines the primary options for implementing countercyclical capital requirements: using a fixed rule or giving the regulatory authorities discretion in deciding when and how to act. He finds that the rule-based approach has more advantages than the approach based on discretion.
Volume (Year): (2011)
Issue (Month): Q II ()
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Viral V. Acharya & Irvind Gujral & Nirupama Kulkarni & Hyun Song Shin, 2011.
"Dividends and Bank Capital in the Financial Crisis of 2007-2009,"
NBER Working Papers
16896, National Bureau of Economic Research, Inc.
- Acharya, Viral V & Gujral, Irvind & Kulkarni, Nirupama & Shin, Hyun Song, 2012. "Dividends and Bank Capital in the Financial Crisis of 2007-2009," CEPR Discussion Papers 8801, C.E.P.R. Discussion Papers.
- Martin Hellwig, 2010.
"Capital Regulation after the Crisis: Business as Usual?,"
Working Paper Series of the Max Planck Institute for Research on Collective Goods
2010_31, Max Planck Institute for Research on Collective Goods.
- Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 8(2), pages 40-46, 07.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- Repullo, R. & Suarez, J., 2010.
"The Procyclical Effects of Bank Capital Regulation,"
2010-29S, Tilburg University, Center for Economic Research.
- Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
- Repullo, Rafael & Suarez, Javier, 2012. "The Procyclical Effects of Bank Capital Regulation," CEPR Discussion Papers 8897, C.E.P.R. Discussion Papers.
- Rafael Repullo & Javier Suarez, 2012. "The Procyclical Effects Of Bank Capital Regulation," Working Papers wp2012_1202, CEMFI.
- Joe Peek & Eric Rosengren, 1993.
"Bank regulation and the credit crunch,"
93-2, Federal Reserve Bank of Boston.
- Admati, Anat R. & DeMarzo, Peter M. & Hellwig, Martin F. & Pfleiderer, Paul, 2010.
"Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive,"
2065, Stanford University, Graduate School of Business.
- Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
- Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
- Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Ben S. Bernanke & Frederic S. Mishkin, 1997.
"Inflation Targeting: A New Framework for Monetary Policy?,"
Journal of Economic Perspectives,
American Economic Association, vol. 11(2), pages 97-116, Spring.
- Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
- Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
- Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2011:i:qii:n:v.96no.2:x:1. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit)
If references are entirely missing, you can add them using this form.