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Macroeconomic effects of bank capital regulation

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  • Eickmeier, Sandra
  • Kolb, Benedikt
  • Prieto, Esteban

Abstract

Bank capital regulations are intended to enhance financial stability in the long run, but may, in the meanwhile, involve costs for the real economy. To examine these costs we propose a narrative index of aggregate tightenings in regulatory US bank capital requirements from 1979 to 2008. Anticipation effects are explicitly taken into account and found to matter. In response to a tightening in capital requirements, banks temporarily reduce business and real estate lending, which temporarily lowers investment, consumption, housing activity and production. A decline in financial and macroeconomic risk helps sustain spending in the medium run. Monetary policy also cushions negative effects of capital requirement tightenings on the economy.

Suggested Citation

  • Eickmeier, Sandra & Kolb, Benedikt & Prieto, Esteban, 2018. "Macroeconomic effects of bank capital regulation," Discussion Papers 44/2018, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:442018
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    References listed on IDEAS

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    5. Tarullo, Daniel, 2008. "Banking on Basel: The Future of International Financial Regulation," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4235, October.
    6. 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.
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    Cited by:

    1. Imbierowicz, Björn & Löffler, Axel & Vogel, Ursula, 2019. "The transmission of bank capital requirements and monetary policy to bank lending," Discussion Papers 49/2019, Deutsche Bundesbank.
    2. Sandra Eickmeier & Benedikt Kolb & Esteban Prieto, 2018. "Effects of bank capital requirement tightenings on inequality," CAMA Working Papers 2018-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

    More about this item

    Keywords

    Narrative Approach; Bank Capital Requirements; Local Projections;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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