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Capital Requirements and Credit Rationing

Author

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  • Itai Agur

Abstract

This paper analyzes the trade-off between financial stability and credit rationing that arises when increasing capital requirements. It extends the Stiglitz-Weiss model of credit rationing to allow for bank default. Bank capital structure then matters for lending incentives. With default and rationing endogenous, optimal capital requirements can be analyzed. Introducing bank financiers, the paper also shows that uninsured funding raises the sensitivity of rationing to capital requirements. In a world with much wholesale finance, capital requirements have a stronger impact on the real economy. But wholesale finance also amplifies capital requirements' effect on default rates.

Suggested Citation

  • Itai Agur, 2010. "Capital Requirements and Credit Rationing," DNB Working Papers 257, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:257
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    File URL: https://www.dnb.nl/binaries/Working%20paper%20257_tcm46-237715.pdf
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    References listed on IDEAS

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    1. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
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    Cited by:

    1. Melesse Wondemhunegn Ezezew, 2015. "Small DSGE Model with Financial Frictions," Working Papers 2015:20, Department of Economics, University of Venice "Ca' Foscari".
    2. Lucyna Gornicka & Sweder van Wijnbergen, 2013. "Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital," Tinbergen Institute Discussion Papers 13-013/VI/DSF50, Tinbergen Institute.
    3. Vinko Zlati'c & Giampaolo Gabbi & Hrvoje Abraham, 2014. "Reduction of systemic risk by means of Pigouvian taxation," Papers 1406.5817, arXiv.org.

    More about this item

    Keywords

    Rationing; Capital requirements; Regulation; Wholesale finance; Deposit Insurance;

    JEL classification:

    • 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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