The cyclicality of bank regulation in a general economic framework

Yu-Hsiu Lin and Len-Kuo Hu

Applied Economics, 2015, vol. 47, issue 53, 5791-5804

Abstract: This article utilizes a representative agent model to address how the regulation policies for banks should respond to the general economic condition. With the consideration of a self-fulfilling deposit insurance facility with sufficient bank reserve to meet the expected need of liquidity shock, our model suggests a counter-cyclical capital adequacy requirement in a competitive loan market. The exception might occur when the moral hazard problem becomes very unwieldy and the representative individual is rather risk averse. With regard to the closure policy, we find that it is closely related to the individual's degree of risk aversion. A counter-cyclical closure policy is recommended when the individual is highly risk averse. Otherwise, a pro-cyclical closure policy is preferred.

Date: 2015
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DOI: 10.1080/00036846.2015.1058908

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