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Reputation, risk-taking and macroprudential policy

  • Aikman, David

    ()

    (Bank of England)

  • Nelson, Benjamin

    ()

    (Bank of England)

  • Tanaka, Misa

    ()

    (Bank of England)

This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. Unprofitable banks have strong incentives to invest in risky assets and generate inefficient credit booms when macroeconomic fundamentals are good in order to signal high ability. We show that across-the-system countercyclical capital requirements that deter credit booms are constrained optimal when fundamentals are within an intermediate range. We also show that when fundamentals are deteriorating, a public announcement of that fact can itself play a powerful role in preventing inefficient credit booms, providing an additional channel through which macroprudential policies can improve outcomes.

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Paper provided by Bank of England in its series Bank of England working papers with number 462.

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Length: 40 pages
Date of creation: 07 Oct 2012
Date of revision:
Handle: RePEc:boe:boeewp:0462
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  1. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
  2. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  3. Misa Tanaka & Glenn Hoggarth, 2006. "Resolving banking crises - an analysis of policy options," Bank of England working papers 293, Bank of England.
  4. Javier Bianchi, 2010. "Credit Externalities: Macroeconomic Effects and Policy Implications," American Economic Review, American Economic Association, vol. 100(2), pages 398-402, May.
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