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Bank’s regulation, asset portfolio choice of banks, and macroeconomic dynamics

Author

Listed:
  • Kosuke Aoki

    (The University of Tokyo)

  • Nao Sudo

    (Bank of Japan)

Abstract

Since the middle of 1990s, the Japanese banks have continuously tilted their asset portfolio towards the government bonds, reducing their lending to …rms. In this paper, we investigate the causes and consequences of such changes in the banks behaviors, by introducing the bank’s asset portfolio decision into an otherwise standard New Keynesian model. The banks in our model construct their portfolio under the value at risk constraint, that requires banks repay their debt regardless of the realization of the asset returns. Under the constraint, an increase in down-side risks, tightening of capital requirement rules or deterioration of the banks net worth reduce the banks’ risk taking capacity, and incurs a shrinkage of the bank’s balance sheet and asset rebalancing towards government bond. The changes in banks’ investment decisions dampen output and inflation. Empirical studies suggest that our theoretical predictions are consistent with behavior of the Japanese banks.

Suggested Citation

  • Kosuke Aoki & Nao Sudo, 2013. "Bank’s regulation, asset portfolio choice of banks, and macroeconomic dynamics," CARF F-Series CARF-F-323, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  • Handle: RePEc:cfi:fseres:cf323
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    References listed on IDEAS

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    Cited by:

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    2. Grzegorz Hałaj, 2016. "Dynamic Balance Sheet Model With Liquidity Risk," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(07), pages 1-37, November.
    3. Kok, Christoffer & Darracq Pariès, Matthieu & Hałaj, Grzegorz, 2016. "Bank capital structure and the credit channel of central bank asset purchases," Working Paper Series 1916, European Central Bank.
    4. Fueki, Takuji & Hürtgen, Patrick & Walker, Todd B., 2024. "Zero-risk weights and capital misallocation," Journal of Financial Stability, Elsevier, vol. 72(C).

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