IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdps/432018.html
   My bibliography  Save this paper

Implications of bank regulation for loan supply and bank stability: A dynamic perspective

Author

Listed:
  • Bucher, Monika
  • Dietrich, Diemo
  • Hauck, Achim

Abstract

A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and future vulnerability to bankruptcy risks. We study these intra- and intertemporal links and analyze the influence of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.

Suggested Citation

  • Bucher, Monika & Dietrich, Diemo & Hauck, Achim, 2018. "Implications of bank regulation for loan supply and bank stability: A dynamic perspective," Discussion Papers 43/2018, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:432018
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/183577/1/1037638875.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 3-41, December.
    2. Hans Gersbach & Jean-Charles Rochet, 2012. "Aggregate Investment Externalities and Macroprudential Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 73-109, December.
    3. Cúrdia, Vasco & Woodford, Michael, 2016. "Credit Frictions and Optimal Monetary Policy," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 30-65.
    4. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 89-112, January.
    5. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    6. Charles Whalen, 2008. "Understanding the Credit Crunch as a Minsky Moment," Challenge, Taylor & Francis Journals, vol. 51(1), pages 91-109.
    7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    8. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599, Elsevier.
    9. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    10. Bucher, Monika & Dietrich, Diemo & Hauck, Achim, 2013. "Business cycles, bank credit and crises," Economics Letters, Elsevier, vol. 120(2), pages 229-231.
    11. √Íscar Jord√Ä & Moritz Schularick & Alan M. Taylor, 2013. "When Credit Bites Back," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 3-28, December.
    12. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    13. Viral V. Acharya & Hamid Mehran & Til Schuermann & Anjan V. Thakor, 2012. "Robust capital regulation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 18(May).
    14. Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
    15. Diemo Dietrich & Achim Hauck, 2012. "Government interventions in banking crises: effects of alternative schemes on bank lending and risk taking," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(2), pages 133-161, May.
    16. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," CEPR Discussion Papers 8678, C.E.P.R. Discussion Papers.
    17. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
    18. Paul Davidson, 2008. "Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? or is it the result of attempting to securitize illiquid noncommercial mortgage loans?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(4), pages 669-676, July.
    19. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    20. Allen, Franklin & Carletti, Elena & Marquez, Robert, 2015. "Deposits and bank capital structure," Journal of Financial Economics, Elsevier, vol. 118(3), pages 601-619.
    21. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    22. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
    23. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
    24. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    25. Philip Arestis & Malcolm Sawyer (ed.), 1994. "The Elgar Companion to Radical Political Economy," Books, Edward Elgar Publishing, number 19.
    26. Alessandro Vercelli, 2009. "A Perspective on Minsky Moments--The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis," Economics Working Paper Archive wp_579, Levy Economics Institute.
    27. Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1699-1707, August.
    28. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
    29. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 161-191, October.
    30. Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 115-148, January.
    31. Oliver Hart & Luigi Zingales, 2011. "A New Capital Regulation for Large Financial Institutions," American Law and Economics Review, Oxford University Press, vol. 13(2), pages 453-490.
    32. Yilmaz, Ensar, 2009. "Capital accumulation and regulation," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 760-771, August.
    33. Arnold, Bruce & Borio, Claudio & Ellis, Luci & Moshirian, Fariborz, 2012. "Systemic risk, macroprudential policy frameworks, monitoring financial systems and the evolution of capital adequacy," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3125-3132.
    34. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
    35. Hyun, Jung-Soon & Rhee, Byung-Kun, 2011. "Bank capital regulation and credit supply," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 323-330, February.
    36. Gianni De Nicolò & Andrea Gamba & Marcella Lucchetta, 2014. "Microprudential Regulation in a Dynamic Model of Banking," Review of Financial Studies, Society for Financial Studies, vol. 27(7), pages 2097-2138.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gersbach, Hans & Rochet, Jean-Charles, 2017. "Capital regulation and credit fluctuations," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 113-124.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, November.
    3. Laurent Clerc & Alexis Derviz & Caterina Mendicino & Stephane Moyen & Kalin Nikolov & Livio Stracca & Javier Suarez & Alexandros P. Vardoulakis, 2015. "Capital Regulation in a Macroeconomic Model with Three Layers of Default," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 9-63, June.
    4. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    5. Gerke, R. & Jonsson, M. & Kliem, M. & Kolasa, M. & Lafourcade, P. & Locarno, A. & Makarski, K. & McAdam, P., 2013. "Assessing macro-financial linkages: A model comparison exercise," Economic Modelling, Elsevier, vol. 31(C), pages 253-264.
    6. Juliane Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," 2015 Meeting Papers 687, Society for Economic Dynamics.
    7. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    8. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
    9. Martinez-Miera, David & Suarez, Javier, 2012. "A Macroeconomic Model of Endogenous Systemic Risk Taking," CEPR Discussion Papers 9134, C.E.P.R. Discussion Papers.
    10. Michał Brzoza‐Brzezina & Marcin Kolasa, 2013. "Bayesian Evaluation of DSGE Models with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1451-1476, December.
    11. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    12. Occhino Filippo & Pescatori Andrea, 2014. "Leverage, investment, and optimal monetary policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-21, January.
    13. Giese, Julia & Nelson, Benjamin & Tanaka, Misa & Tarashev, Nikola, 2013. "Financial Stability Paper No 21: How could macroprudential policy affect financial system resilience and credit? Lessons from the literature," Bank of England Financial Stability Papers 21, Bank of England.
    14. Gersbach, Hans & Rochet, Jean-Charles & Scheffel, Martin, 2015. "Financial Intermediation, Capital Accumulation, and Recovery," CEPR Discussion Papers 10964, C.E.P.R. Discussion Papers.
    15. Freixas, Xavier & Perez-Reyna, David, 2021. "Optimal macroprudential policy and rational bubbles," Journal of Financial Intermediation, Elsevier, vol. 46(C).
    16. Juliane M. Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," Harvard Business School Working Papers 15-072, Harvard Business School, revised Sep 2016.
    17. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
    18. Bordo, M.D. & Meissner, C.M., 2016. "Fiscal and Financial Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 355-412, Elsevier.
    19. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS
    20. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2018. "Optimal Dynamic Capital Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1271-1297, September.
    21. Tamim Bayoumi & Giovanni Dell'Ariccia & Karl F Habermeier & Tommaso Mancini Griffoli & Fabian Valencia, 2014. "Monetary Policy in the New Normal," IMF Staff Discussion Notes 14/3, International Monetary Fund.

    More about this item

    Keywords

    bank lending; banking crisis; bank capital regulation; liquidity regulation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdps:432018. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/dbbgvde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/dbbgvde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.