Cyclical implications of minimum capital requirements
Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks' capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic downturn. We examine the problem of cyclicality in a macroeconomic model which explicitly takes regulatory constraints into account. We find that the capital buffer which banks hold on top of the required minimum plays a crucial role in mitigating the volatility in capital requirements. Therefore, despite the fact that capital charges may vary significantly over time, the effects on the macroeconomy will be moderate.
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- Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2004.
"Financial intermediaries, markets, and growth,"
04-24, Federal Reserve Bank of Philadelphia.
- Falko Fecht & Kevin X.D. Huang & Antoine Martin, 2007. "Financial Intermediaries, Markets, and Growth," Vanderbilt University Department of Economics Working Papers 0714, Vanderbilt University Department of Economics.
- Falko Fecht & Kevin Huang, 2004. "Financial intermediaries, markets, and growth," Econometric Society 2004 North American Summer Meetings 419, Econometric Society.
- Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2004. "Financial intermediaries, markets, and growth," Research Working Paper RWP 04-02, Federal Reserve Bank of Kansas City.
- Fecht, Falko & Huang, Kevin & Martin, Antoine, 2005. "Financial intermediaries, markets and growth," Discussion Paper Series 1: Economic Studies 2005,03, Deutsche Bundesbank, Research Centre.
- Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre.
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