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Jointly optimal regulation of bank capital and maturity structure

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  • Ansgar Walther

Abstract

Banks create excessive systemic risk through leverage and maturity mismatch, as financial constraints introduce welfare-reducing pecuniary externalities. Macroprudential regulators can achieve efficiency with simple linear constraints on banks' balance sheets, which require less information than Pigouvian taxes. These can be implemented using the Liquidity Coverage and Net Stable Funding ratios of Basel III. When bank failures are socially costly, microprudential regulation of leverage is also required. Optimally, macroprudential policy reacts to changes in systematic risk and credit conditions over the business cycle, while microprudential policy reacts to both systematic and idiosyncratic risk.

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  • Ansgar Walther, 2014. "Jointly optimal regulation of bank capital and maturity structure," Economics Series Working Papers 725, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:725
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    More about this item

    Keywords

    Systemic risk; leverage; maturity mismatch; macroprudential regulation; liquidiity; capital requirements; fire sales;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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