Bank Capital Requirements: A Quantitative Analysis

Thien Tung Nguyen
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Thien Tung Nguyen: OH State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: This paper examines the welfare implications of bank capital requirements in a general equilibrium model in which a dynamic banking sector endogenously determines aggregate growth. Due to government bailouts, banks engage in risk-shifting, thereby depressing investment efficiency; furthermore, they over-lever, causing fragility in the financial sector. Capital regulation can address these distortions and has a first-order effect on both growth and welfare. In the model, the optimal level of minimum Tier 1 capital requirement is 8%, greater than that prescribed by both Basel II and III. Increasing bank capital requirements can produce welfare gains greater than 1% of lifetime consumption.

JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-dge, nep-fdg and nep-rmg
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2015-14

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