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Capital Requirements and Business Cycles with Credit Market Imperfections

  • Pierre-Richard
  • K. Alper
  • L. Pereira da Silva

The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. Bank capital increases incentives for banks to monitor borrowers, thereby raising the repayment probability, and excess capital generates benefits in terms of reduced regulatory scrutiny. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Simulations of a supply shock show that, depending on the elasticity that relates the repayment probability to the bank capital–loan ratio, the Basel II regime may be less procyclical than a Basel I regime.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps231.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 231.

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Date of creation: Jan 2011
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Handle: RePEc:bcb:wpaper:231
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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