Optimal Bank Capital Regulation, the Real Sector, and the State of the Economy

Michael Kogler (michael.kogler@svr-wirtschaft.de)

No 1615, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: Concerns about the procyclicality of bank regulation have motivated recent reforms that include countercyclical measures. This paper analyzes how optimal capital requirements, which balance a trade-off between financial stability and investment of the real sector, adjust during a downturn. Adding an endogenous loan market reveals equilibrium effects that strongly influence the adjustment and allows studying the implications of real shocks. The results suggest a nuanced adjustment depending on the shock: In a capital crunch, capital requirements are relaxed to prevent a sharp decline in investment. If productivity decreases, they are tightened as preserving financial stability entails a smaller cost.

Keywords: Capital Regulation; Credit Markets; Banking Crisis; Business Cycle (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-08
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2016:15

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