Macroprudential Policy with Capital Buffers
49 Pages Posted: 27 Feb 2019
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Macroprudential Policy with Capital Buffers
Macroprudential Policy with Capital Buffers
Date Written: February 22, 2019
Abstract
This paper studies optimal bank capital requirements in a model of endogenous bank funding conditions. I find that requirements should be higher during good times such that a macroprudential "buffer" is provided. However, whether banks can use buffers to maintain lending during a financial crisis depends on the capital requirement during the subsequent recovery. The reason is that a high requirement during the recovery lowers bank shareholder value during the crisis and thus creates funding-market pressure to use buffers for deleveraging rather than for maintaining lending. Therefore, buffers are useful if banks are not required to rebuild them quickly.
Keywords: financial frictions, financial intermediation, regulation, counter-cyclical capital requirements, market discipline, access to funding
JEL Classification: E13, E32, E44
Suggested Citation: Suggested Citation