Capital requirements, risk-taking and welfare in a growing economy

Arbeitspapier

The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IDB Working Paper Series ; No. IDB-WP-771

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Financial Institutions and Services: Government Policy and Regulation ; One, Two, and Multisector Growth Models
• Subject: Capital requirements ; Bank risk-taking ; Growth and welfare

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Agénor, Pierre-Richard ; da Silva, Luiz A. Pereira
• Event: Veröffentlichung
• (who): Inter-American Development Bank (IDB)
• (where): Washington, DC
• (when): 2017

Further information

• DOI: doi:10.18235/0000645
• Handle: http://hdl.handle.net/10419/173845
• Last update: 10.03.2025, 11:44 AM CET