Dynamic Bank Capital Requirements

Tetiana Davydiuk
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Tetiana Davydiuk: Wharton School, University of Pennsylvania

No 1328, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: The Basel III Accord requires countercyclical capital buffers to protect the banking system against potential losses associated with excessive credit growth and buildups of systemic risk. In this paper, I provide a rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 4% and 6% and depends on economic growth, bank supply of credit, and asset prices. Specifically, a one standard deviation increase in the bank credit-to-GDP ratio (GDP) translates into a 0.1% (0.7%) increase in capital requirements, while each standard deviation increase in the liquidity premium leads to a 0.1% decrease. The welfare gain from implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.

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 (19)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1328

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