 Bank capital shocks and countercyclical requirements: Implications for banking stability and welfareStelios Bekiros, Rachatar Nilavongse and Gazi Uddin Journal of Economic Dynamics and Control, 2018, vol. 93, issue C, 315-331 Abstract: This paper incorporates anticipated and unanticipated shocks to bank capital into a DSGE model with a banking sector. We apply this model to study Basel III countercyclical capital requirements and their implications for banking stability and household welfare. We introduce three different countercyclical capital rules. The first countercyclical capital rule responds to credit to output ratio. The second countercyclical rule reacts to deviations of credit to its steady state, and the third rule reacts to credit growth. The second rule proves to be the most effective tool in dampening credit supply, housing demand and household debt as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio. After conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule, the baseline and the third rule respectively in terms of welfare accumulation. Keywords: Banking stability; Basel III; Capital requirements; News shocks; Welfare analysis (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:93:y:2018:i:c:p:315-331 DOI: 10.1016/j.jedc.2018.01.049 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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