Risky bank lending and countercyclical capital buffers

Jaromir Benes and Michael Kumhof

Journal of Economic Dynamics and Control, 2015, vol. 58, issue C, 58-80

Abstract: We study the properties of a monetary economy with an essential role for risky bank lending. Banks issue deposits and lend to entrepreneurs. Because banks׳ lending rate cannot be made contingent on aggregate shocks, and because banks face capital adequacy regulations, they require a capital buffer against loan losses. Capital adequacy regulations are modeled on the Basel-III rules, including a minimum capital adequacy ratio, an endogenous capital conservation buffer, and a countercyclical capital buffer. We find that a countercyclical capital buffer leads to a significant increase in welfare. It also reduces the need for countercyclical adjustments in policy interest rates.

Keywords: Bank lending; Lending risk; Financial accelerator; Monetary policy; Macroprudential policy; Bank capital adequacy (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (77)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:58:y:2015:i:c:p:58-80

DOI: 10.1016/j.jedc.2015.06.005

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