Jointly optimal regulation of bank capital and maturity structure

Ansgar Walther

No 725, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Banks create excessive systemic risk through leverage and maturity mismatch, as financial constraints introduce welfare-reducing pecuniary externalities. Macroprudential regulators can achieve efficiency with simple linear constraints on banks' balance sheets, which require less information than Pigouvian taxes. These can be implemented using the Liquidity Coverage and Net Stable Funding ratios of Basel III. When bank failures are socially costly, microprudential regulation of leverage is also required. Optimally, macroprudential policy reacts to changes in systematic risk and credit conditions over the business cycle, while microprudential policy reacts to both systematic and idiosyncratic risk.

Keywords: Systemic risk; leverage; maturity mismatch; macroprudential regulation; liquidiity; capital requirements; fire sales (search for similar items in EconPapers)
JEL-codes: E44 G18 G21 G28 (search for similar items in EconPapers)
Date: 2014-09-25
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-mac and nep-rmg
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