Optimal Dynamic Capital Requirements

Kalin Nikolov, Javier Suarez, Dominik Supera and Caterina Mendicino
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Dominik Supera: European Central Bank

No 1216, 2017 Meeting Papers from Society for Economic Dynamics

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.

Date: 2017
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-rmg
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Optimal Dynamic Capital Requirements (2018)
Working Paper: Optimal Dynamic Capital Requirements (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1216

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