Optimal Capital Requirements over the Business and Financial Cycles

Frederic Malherbe

American Economic Journal: Macroeconomics, 2020, vol. 12, issue 3, 139-74

Abstract: I study economies where banks do not fully internalize the social costs of their lending decisions, which leads to real overinvestment. The bank capital requirement that restores investment efficiency varies over time. During booms, more investment is desirable, so the banking sector must be allowed to expand. This suggests a loosening of the requirement. However, there is also more bank capital. Since the banking sector exhibits decreasing returns to scale, this suggests a tightening instead. I find that the latter effect, which I dub the "bank capital channel," dominates: the optimal capital requirement is tighter during booms than in recessions.

JEL-codes: E32 E44 G21 G28 G32 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/mac.20160140 (application/pdf)
https://www.aeaweb.org/doi/10.1257/mac.20160140.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Optimal capital requirements over the business and financial cycles (2015)
Working Paper: Optimal capital requirements over the business and financial cycles (2015)
Working Paper: Optimal Capital Requirements over the Business and Financial Cycles (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:12:y:2020:i:3:p:139-74

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/mac.20160140

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().