Macroprudential policy with capital buffers
No 771, BIS Working Papers from Bank for International Settlements
This paper studies optimal bank capital requirements in a model of endogenous bank funding conditions. I find that requirements should be higher during good times such that a macroprudential "buffer" is provided. However, whether banks can use buffers to maintain lending during a financial crisis depends on the capital requirement during the subsequent recovery. The reason is that a high requirement during the recovery lowers bank shareholder value during the crisis and thus creates funding-market pressure to use buffers for deleveraging rather than for maintaining lending. Therefore, buffers are useful if banks are not required to rebuild them quickly.
Keywords: financial frictions; financial intermediation; regulation; counter-cyclical capital requirements; market discipline; access to funding (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, nep-cba, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:771
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