Capital Requirements, Risk-Taking and Welfare in a Growing Economy

Pierre-Richard Agénor and Luiz Awazu Pereira da Silva ()

No 8206, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.

Keywords: risky investments; financial stability; financial regulation (search for similar items in EconPapers)
JEL-codes: E44 G28 O41 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp, nep-dge, nep-fdg, nep-knm, nep-mac and nep-rmg
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Related works:
Journal Article: Capital requirements, risk-taking and welfare in a growing economy (2021)
Working Paper: Capital Requirements, Risk Taking and Welfare in a Growing Economy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:8206

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