Credit allocation, capital requirements and output
We show how banks’ excessive risk-taking, stemming from informational asymmetries in loan markets, can lead to an excessive output loss when a recession starts. Risk-based capital requirements can alleviate the output loss by reducing excessive risk-taking in ‘normal’ times. Model simulations suggest that the differentiation of risk-weights in the Basel framework might be further increased in order to take full advantage of the allocational effects of capital requirements. Our analysis also provides a new rationale for the countercyclical elements of capital requirements.
|Date of creation:||01 Dec 2010|
|Date of revision:|
|Publication status:||Forthcoming as Jokivuolle, Esa, Ilkka Kiema and Timo Vesala, 'Credit allocation, capital requirements and output' in Journal of Financial Services Research .|
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