The Effects of Capital Requirements on Good and Bad Risk-Taking

N Aaron Pancost and Roberto Robatto

The Review of Financial Studies, 2023, vol. 36, issue 2, 733-774

Abstract: We study capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. A novel general equilibrium channel that operates through firms deposits mitigates the cost of increasing capital requirements. In the calibrated model, (a) the optimal capital requirement is 7.3 percentage points higher than in a comparable model in which all the deposits are held by households, and (b) setting the capital requirement higher than the true optimum is not as costly as one would gauge from the comparable model. We also provide some independent evidence that supports our novel channel.

JEL-codes: E20 G21 G32 (search for similar items in EconPapers)
Date: 2023
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Working Paper: The Effects of Capital Requirements on Good and Bad Risk Taking (2019)
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