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A dynamic model of bank behaviour under multiple regulatory constraints

Author

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  • Behn, Markus
  • Daminato, Claudio
  • Salleo, Carmelo

Abstract

We develop a dynamic structural model of bank behaviour that provides a microeconomic foundation for bank capital and liquidity structures and analyses the effects of changes in regulatory capital and liquidity requirements as well as their interaction. Our findings suggest that adjustments in both types of requirements can have an impact on loan supply, with considerable heterogeneity across banks and over time. The model illustrates that banks' reactions depend on initial balance sheet conditions and reconciles evidence on short-term reductions in loan supply with findings suggesting that better capitalized banks are better able to lend in the medium- to long-term. JEL Classification: G21, G28, G32

Suggested Citation

  • Behn, Markus & Daminato, Claudio & Salleo, Carmelo, 2019. "A dynamic model of bank behaviour under multiple regulatory constraints," Working Paper Series 2233, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20192233
    Note: 2203070
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    Cited by:

    1. Xiong, Wanting & Wang, Yougui, 2022. "A reformulation of the bank lending channel under multiple prudential regulations," Economic Modelling, Elsevier, vol. 114(C).
    2. Lang, Jan Hannes & Menno, Dominik, 2023. "The state-dependent impact of changes in bank capital requirements," Working Paper Series 2828, European Central Bank.
    3. Martin Hodula & Zlatuše Komárková & Lukáš Pfeifer, 2021. "The relationship between capital and liquidity prudential instruments," Journal of Regulatory Economics, Springer, vol. 59(1), pages 47-70, February.
    4. Laeven, Luc & Maddaloni, Angela & Mendicino, Caterina, 2022. "Monetary policy, macroprudential policy and financial stability," Working Paper Series 2647, European Central Bank.
    5. Behn, Markus & Forletta, Marco & Reghezza, Alessio, 2024. "Buying insurance at low economic cost – the effects of bank capital buffer increases since the pandemic," Working Paper Series 2951, European Central Bank.
    6. Juan Mariscal-Cáceres & Carmen Cristófol-Rodríguez & Luis Manuel Cerdá-Suárez, 2024. "Regulatory Implications of the Supervision and Management of Liquidity Risk: An Analysis of Recent Developments in Spanish Financial Institutions," JRFM, MDPI, vol. 17(2), pages 1-22, January.
    7. Retselisitsoe I. Thamae & Nicholas M. Odhiambo, 2022. "The impact of bank regulation on bank lending: a review of international literature," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(4), pages 405-418, December.
    8. Vo, Quynh-Anh, 2021. "Interactions of capital and liquidity requirements: a review of the literature," Bank of England working papers 916, Bank of England.
    9. Mariña Martínez-Malvar & Laura Baselga-Pascual, 2020. "Bank Risk Determinants in Latin America," Risks, MDPI, vol. 8(3), pages 1-20, September.

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    More about this item

    Keywords

    bank regulation; capital structure; liquidity structure; structural model;
    All these keywords.

    JEL classification:

    • 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
    • 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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