Bank Capital Regulation in General Equilibrium

Gary Gorton and Andrew Winton

No 5244, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study whether the socially optimal level of stability of the banking system can be implemented with regulatory capital requirements in a multi-period general equilibrium model of banking. We show that: (i) bank capital is costly because of the unique liquidity services provided by demand deposits, so a bank regulator may optimally choose to have a risky banking system; (ii) even if the regulator prefers more capital in the system, the regulator is constrained by the private cost of bank capital, which determines whether bank shareholders will agree to meet capital requirements rather than exit the industry.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 1995-08
Note: CF
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Citations: View citations in EconPapers (27)

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Working Paper: Bank Capital Regulation in General Equilibrium
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