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Optimal Capital Regulation

Author

Listed:
  • Josef Schroth

    (Bank of Canada)

  • Stephane Moyen

    (Deutsche Bundesbank)

Abstract

We study constrained-efficient bank capital regulation in a model with market-imposed equity requirements. Banks hold equity buffers to insure against sudden loss of funding access. However, bank equity is privately costly in the model such that banks choose only partial self-insurance. Equity requirements are occasionally binding as a result. Constrained-efficient regulation requires banks to build up additional equity buffers and compensates them for the cost of equity with a permanent increase in lending margins. When buffers are depleted regulation relaxes market-imposed equity requirements by raising bank future prospects via temporarily elevated lending margins.

Suggested Citation

  • Josef Schroth & Stephane Moyen, 2017. "Optimal Capital Regulation," 2017 Meeting Papers 828, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:828
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_828.pdf
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    References listed on IDEAS

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    Cited by:

    1. Josef Schroth, 2019. "Macroprudential policy with capital buffers," BIS Working Papers 771, Bank for International Settlements.
    2. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    3. Maarten van Oordt, 2018. "Calibrating the Magnitude of the Countercyclical Capital Buffer Using Market-Based Stress Tests," Staff Working Papers 18-54, Bank of Canada.

    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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