Optimal Dynamic Capital Requirements

Caterina Mendicino, Kalin Nikolov, Javier Suarez and Dominik Supera ()
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Dominik Supera: University of Pennsylvania

Working Papers from CEMFI

Abstract: We characterize welfare maximizing capital requirement policies in a macroeconomic model with household, firm and bank defaults calibrated to Euro Area data. We optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk. We find that getting the level right (so that bank failure risk remains small) is of foremost importance, while the optimal sensitivity to default risk is positive but typically smaller than under Basel IRB formulas. When starting from low levels, initially both savers and borrowers benefit from higher capital requirements. At higher levels, only savers are in favour of tighter and more time-varying capital charges.

Keywords: Macroprudential policy; bank fragility; capital requirements; financial frictions; default risk. (search for similar items in EconPapers)
JEL-codes: E3 E44 G01 G21 (search for similar items in EconPapers)
Date: 2016-12
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 (21)

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https://www.cemfi.es/ftp/wp/1614.pdf (application/pdf)

Related works:
Journal Article: Optimal Dynamic Capital Requirements (2018)
Working Paper: Optimal Dynamic Capital Requirements (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2016_1614

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