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Optimal Dynamic Capital Requirements

Author

Listed:
  • Kalin Nikolov

    (European Central Bank)

  • Javier Suarez

    (CEMFI)

  • Dominik Supera

    (European Central Bank)

  • Caterina Mendicino

    (European Central Bank)

Abstract

We characterize welfare maximizing capital requirement policies in a macroeconomic model with household, firm and bank defaults calibrated to Euro Area data. We optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk. We find that getting the level right (so that bank failure risk remains small) is of foremost importance, while the optimal sensitivity to default risk is positive but typically smaller than under Basel IRB formulas. When starting from low levels, initially both savers and borrowers benefit from higher capital requirements. At higher levels, only savers are in favour of tighter and more time-varying capital charges.

Suggested Citation

  • Kalin Nikolov & Javier Suarez & Dominik Supera & Caterina Mendicino, 2017. "Optimal Dynamic Capital Requirements," 2017 Meeting Papers 1216, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1216
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    Cited by:

    1. Ambrocio, Gene & Jokivuolle, Esa, 2017. "Should bank capital requirements be less risk-sensitive because of credit constraints?," Research Discussion Papers 10/2017, Bank of Finland.
    2. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2017. "Monetary and macroprudential policy with foreign currency loans," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 352-372.
    3. repec:prs:ecstat:estat_0336-1454_2017_num_494_1_10781 is not listed on IDEAS
    4. R. Wouters, 2016. "The transmission mechanism of new and traditional instruments of monetary and macroprudential policy," Economic Review, National Bank of Belgium, issue iii, pages 105-117, December.
    5. repec:eee:ecmode:v:72:y:2018:i:c:p:391-409 is not listed on IDEAS
    6. Elena Mattana & Ettore Panetti, 2017. "The Welfare Costs of Self-Fulfilling Bank Runs," Working Papers REM 2017/17, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    7. repec:prs:ecsecs:estat_0336-1454_2017_num_494_1_10781 is not listed on IDEAS

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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