Bank Behavior Under Capital Regulation: What Does the Academic Literature Tell Us?
NFI Working Paper No. 2006-WP-04
63 Pages Posted: 10 Aug 2006
Date Written: July 1, 2006
Abstract
This paper reviews academic studies of bank capital regulation in an effort to evaluate the intellectual foundation for the imposition of the Basel I and Basel II systems of risk-based capital requirements. The theoretical literature yields general agreement about the immediate effects of capital requirements on bank lending and loan rates and the longer-term impacts on bank ratios of equity to total or risk-adjusted assets. This literature produces highly mixed predictions, however, regarding the effects of capital regulation on bank asset risk and overall safety and soundness. Research also indicates that bank capital regulation can have procyclical macroeconomic effects and can impinge on the effectiveness of monetary policy. Although empirical research provides some support for the macroeconomic and monetary policy implications of risk-based capital requirements, conclusions about actual bank balance-sheet and risk adjustments to capital regulation are also mixed. Thus, the intellectual foundation for the present capital-regulation regime is not particularly strong. The mixed conclusions in the academic literature on banking certainly does not provide unqualified support for moving to an even more stringent and costly system of capital requirements.
Keywords: Bank capital regulation, Capital requirements
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Monetary Policy with a Touch of Basel
By Ralph Chami and Thomas F. Cosimano
-
Monetary Policy with a Touch of Basel
By Ralph Chami and Thomas F. Cosimano
-
Bank Capital Channels in the Monetary Transmission Mechanism
-
A Model of Bank Capital, Lending and the Macroeconomy: Basel I Versus Basel Ii
By Lea Zicchino
-
Bank Procyclicality, Credit Crunches, and Asymmetric Monetary Policy Effects: A Unifying Model
By Robert R. Bliss and George G. Kaufman
-
Bank Procyclicality, Credit Crunches, and Asymmetric Monetary Policy Effects: A Unifying Model
By Robert R. Bliss and George G. Kaufman
-
How Do Bank Capital and Capital Adequacy Regulation Affect the Monetary Transmission Mechanism?
By Misa Tanaka