The state-dependent impact of changes in bank capital requirements

Arbeitspapier

Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In "normal" states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a "pricing channel" which is small: around 0.1% less loans for a 1pp increase in capital requirements. In "bad" states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a "quantity channel", which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in "normal" states and an order of magnitude higher in "bad" states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in "normal" macro-financial environments.

Object Details

• ISBN: 978-92-899-6113-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2828

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Theory ; Financial Markets and the Macroeconomy ; Money Supply; Credit; Money Multipliers ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Bank capital requirements ; loan supply ; dynamic stochastic equilibrium model ; financial accelerator ; global solution methods

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lang, Jan Hannes ; Menno, Dominik
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2023

Further information

• DOI: doi:10.2866/301976
• Handle: http://hdl.handle.net/10419/278660
• Last update: 10.03.2025, 11:41 AM CET