Optimal capital regulation

Arbeitspapier

We study constrained-efficient bank capital regulation in a model with market-imposed equity requirements. Banks hold equity buffers to insure against sudden loss of access to funding. However, in the model, banks choose to only partially self-insure because equity is privately costly. As a result, equity requirements are occasionally binding. Constrained-efficient regulation requires banks to build up additional equity buffers and compensates them for the cost of equity with a permanent increase in lending margins. When buffers are depleted, regulation relaxes the market-imposed equity requirements by raising bank future prospects through temporarily elevated lending margins.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2017-6

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Neoclassical ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy
• Subject: Credit and credit aggregates ; Financial institutions ; Financial stability ; Financial system regulation and policies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Moyen, Stéphane ; Schroth, Josef
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2017

Further information

• DOI: doi:10.34989/swp-2017-6
• Handle: http://hdl.handle.net/10419/171960
• Last update: 10.03.2025, 11:42 AM CET