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The Effects of Capital Requirements on Good and Bad Risk Taking

Author

Listed:
  • Nathaniel Pancost

    (University of Texas at Austin McCombs Sc)

  • Roberto Robatto

    (University of Wisconsin-Madison)

Abstract

We study optimal capital requirement regulation in a dynamic quantitative model in which deposits facilitate real economic activity and thus the value of deposits is microfounded. We identify a novel general equilibrium effect that drives a wedge between the private value of deposits (i.e., the value to price-taking agents, measured by the deposit premium) and the social value of deposits (i.e., the value that matters for regulation). The wedge reduces the social value of deposits, and as a result, the optimal capital requirement is substantially higher than in comparable models in the literature. Nonetheless, even when the marginal social value of deposits is very low, setting capital requirements too high is suboptimal.

Suggested Citation

  • Nathaniel Pancost & Roberto Robatto, 2019. "The Effects of Capital Requirements on Good and Bad Risk Taking," 2019 Meeting Papers 638, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:638
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    Cited by:

    1. Pietro Dindo & Andrea Modena & Loriana Pelizzon, 2019. "Risk Pooling, Leverage, and the Business Cycle," Working Papers 2019: 21, Department of Economics, University of Venice "Ca' Foscari".
    2. Ahmad Peivandi & Mohammad Abbas Rezaei & Ajay Subramanian, 2023. "Optimal design of bank regulation under aggregate risk," Mathematics and Financial Economics, Springer, volume 17, number 2, December.
    3. Isabel Gödl-Hanisch & Jordan Pandolfo, 2025. "Monetary Policy Transmission, Bank Market Power, and Income Source," CESifo Working Paper Series 11847, CESifo.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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