Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model

Juliane Begenau
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Juliane Begenau: Stanford GSB

Research Papers from Stanford University, Graduate School of Business

Abstract: This paper develops a quantitative dynamic general equilibrium model in which households’ preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.

JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3554

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