Macroprudential Regulation and Misallocation

37 Pages Posted: 12 Aug 2016

See all articles by Enoch Hill

Enoch Hill

University of Minnesota - Twin Cities - Department of Economics; Wheaton College

David Perez-Reyna

Universidad de los Andes, Colombia

Date Written: July 13, 2016

Abstract

In this paper, we study the macroeconomic effects of banking capital requirements. We provide a theoretical explanation for why decreasing capital requirements may lead to lower average leverage ratio among banks. This counterintuitive result is an outcome of the general equilibrium effects on interest rates, which affects capital allocation across different types of banks. Additionally, we find that the optimal policy for capital requirements depends on the available equity in the banking sector. Countries with a relatively undeveloped financial sector should have a higher capital requirement. For countries in the middle the optimal policy is a relaxed capital requirement. Finally, countries with a large amount of domestic capital are unaffected by capital requirements.

Keywords: Banking Capital Requirements, Misallocation

JEL Classification: E44, G21, G28

Suggested Citation

Hill, Enoch and Hill, Enoch and Perez-Reyna, David, Macroprudential Regulation and Misallocation (July 13, 2016). Documento CEDE No. 2016-25, Available at SSRN: https://ssrn.com/abstract=2821958 or http://dx.doi.org/10.2139/ssrn.2821958

Enoch Hill (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

Wheaton College ( email )

501 College Ave
Wheaton, IL 60187
United States
6307525315 (Phone)

David Perez-Reyna

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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