How does capital regulation react to monetary policy? New evidence on the risk-taking channel

Claudio de Moraes (), Gabriel Montes and José Américo Pereira Antunes

Economic Modelling, 2016, vol. 56, issue C, 177-186

Abstract: Before the subprime crisis, financial stability was a microprudential issue addressed by capital regulation and unrelated to monetary policy. The financial crisis put this paradigm to the test and turned the spotlight on the relationship between financial stability and monetary policy. Hence, the following question arises: how does capital regulation react to monetary policy? This article seeks to answer this question. We analyze the link involving monetary policy and capital regulation through the risk-taking channel in Brazil. The findings suggest that banks react to monetary policy by changing the amount of loan provisions as well as the capital adequacy ratio (CAR). An important novelty of the study is the evidence that there is no trade-off between provisions and CAR, which are important tools used by banking supervisors. The key result of the article is that banks react to the macroeconomic environment differently from what is expected by banking supervision, i.e., there exists a paradox between the microprudential view and the macroprudential view. Thus, in terms of practical implication, a banking supervision strategy for financial stability must take into account the effects of monetary policy.

Keywords: Financial regulation; Monetary policy; Risk-taking channel (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:56:y:2016:i:c:p:177-186

DOI: 10.1016/j.econmod.2016.03.025

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