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The Long-Term Effects of Capital Requirements

Author

Listed:
  • Gianni De Nicolò
  • Nataliya Klimenko
  • Sebastian Pfeil
  • Jean-Charles Rochet

Abstract

We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.

Suggested Citation

  • Gianni De Nicolò & Nataliya Klimenko & Sebastian Pfeil & Jean-Charles Rochet, 2021. "The Long-Term Effects of Capital Requirements," CESifo Working Paper Series 9115, CESifo.
  • Handle: RePEc:ces:ceswps:_9115
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Long-Term Effects of Capital Requirements
      by Christian Zimmermann in NEP-DGE blog on 2021-09-06 21:21:09

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    Cited by:

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    2. Gulan, Adam & Jokivuolle, Esa & Verona, Fabio, 2022. "Optimal bank capital requirements: What do the macroeconomic models say?," BoF Economics Review 2/2022, Bank of Finland.
    3. Andreas Haufler & Christoph Lülfesmann, 2022. "Voluntary Equity, Project Risk, and Capital Requirements," CESifo Working Paper Series 9505, CESifo.
    4. Hoffmann, Florian & Pfeil, Sebastian, 2021. "Dynamic multitasking and managerial investment incentives," Journal of Financial Economics, Elsevier, vol. 142(2), pages 954-974.

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    More about this item

    Keywords

    bank capital requirements; credit crunch; systemic risk;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • 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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