Bank Capital, Liquidity, and Systemic Risk

Jürgen Eichberger and Martin Summer

Journal of the European Economic Association, 2005, vol. 3, issue 2-3, 547-555

Abstract: We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management, and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation on systemic risk. In particular we can analyze the impact of regulation on contagious defaults arising from mutual credit relations. We show that the impact of capital adequacy on systemic stability is ambiguous and that systemic risk might actually increase as a consequence of imposing capital constraints on banks. (JEL: G21, G28, E44) Copyright (c) 2005 The European Economic Association.

Date: 2005
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Related works:
Working Paper: Bank capital, liquidity and systemic risk (2004)
Working Paper: Bank Capital, Liquidity and Systemic Risk (2004)
Working Paper: Bank Capital, Liquidity and Systemic Risk (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:jeurec:v:3:y:2005:i:2-3:p:547-555

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