Macroprudential Policy with Capital Buffers

Josef Schroth

Staff Working Papers from Bank of Canada

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: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Business fluctuations and cycles; Credit risk management; Lender of last resort (search for similar items in EconPapers)
JEL-codes: E13 E32 E44 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Macroprudential policy with capital buffers (2021)
Working Paper: Macroprudential policy with capital buffers (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-8

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