Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking

55 Pages Posted: 25 Mar 2012

See all articles by Gianni De Nicoló

Gianni De Nicoló

affiliation not provided to SSRN

Andrea Gamba

University of Warwick - Finance Group

Marcella Lucchetta

Ca Foscari University of Venice

Date Written: March 2012

Abstract

This paper studies the impact of bank regulation and taxation in a dynamic model with banks exposed to credit and liquidity risk. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain requirement threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. The costs of high capital and liquidity requirements represent a lower bound on the benefits of these regulations in abating systemic risks. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities.

Keywords: Bank Regulation, Taxation, Dynamic Banking Model, Capital, Credit Risk, Economic Models, Liquidity

JEL Classification: G21, G28, G33

Suggested Citation

De Nicoló, Gianni and Gamba, Andrea and Lucchetta, Marcella, Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking (March 2012). IMF Working Paper No. 12/72, Available at SSRN: https://ssrn.com/abstract=2028248

Gianni De Nicoló (Contact Author)

affiliation not provided to SSRN

No Address Available

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Marcella Lucchetta

Ca Foscari University of Venice ( email )

Venice
Italy

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