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Optimal Capital Regulation

Stéphane Moyen () and Josef Schroth

Staff Working Papers from Bank of Canada

Abstract: We study constrained-efficient bank capital regulation in a model with market-imposed equity requirements. Banks hold equity buffers to insure against sudden loss of access to funding. However, in the model, banks choose to only partially self-insure because equity is privately costly. As a result, equity requirements are occasionally binding. Constrained-efficient regulation requires banks to build up additional equity buffers and compensates them for the cost of equity with a permanent increase in lending margins. When buffers are depleted, regulation relaxes the market-imposed equity requirements by raising bank future prospects through temporarily elevated lending margins.

Keywords: Credit and credit aggregates; Financial Institutions; Financial stability; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: E13 E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-6

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