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Macroprudential Policy with Capital Buffers

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Listed:
  • Josef Schroth

Abstract

This paper studies optimal bank capital requirements in a model of endogenous bank funding conditions. I find that requirements should be higher during good times such that a macroprudential “buffer” is provided. However, whether banks can use buffers to maintain lending during a financial crisis depends on the capital requirement during the subsequent recovery. The reason is that a high requirement during the recovery lowers bank shareholder value during the crisis and thus creates funding-market pressure to use buffers for deleveraging rather than for maintaining lending. Therefore, buffers are useful if banks are not required to rebuild them quickly.

Suggested Citation

  • Josef Schroth, 2019. "Macroprudential Policy with Capital Buffers," Staff Working Papers 19-8, Bank of Canada.
  • Handle: RePEc:bca:bocawp:19-8
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Credit and credit aggregates; Financial stability; Financial system regulation and policies; Business fluctuations and cycles; Credit risk management; Lender of last resort;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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