The Long-Term Effects of Capital Requirements

Gianni De Nicolò, Nataliya Klimenko, Sebastian Pfeil and Jean Rochet

No 9115, CESifo Working Paper Series from CESifo

Abstract: We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.

Keywords: bank capital requirements; credit crunch; systemic risk (search for similar items in EconPapers)
JEL-codes: E21 E32 F44 G21 G28 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The Long-Term Effects of Capital Requirements (2021)
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