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Macroprudential Regulation and Misallocation

Enoch Hill () and David Perez-Reyna ()

Documentos CEDE from Universidad de los Andes - CEDE

Abstract: In this paper, we study the macroeconomic effects of banking capital requirements. We provide a theoretical explanation for why decreasing capital requirements may lead to lower average leverage ratio among banks. This counterintuitive result is an outcome of the general equilibrium effects on interest rates, which affects capital allocation across different types of banks. Additionally, we find that the optimal policy for capital requirements depends on the available equity in the banking sector. Countries with a relatively undeveloped financial sector should have a higher capital requirement. For countries in the middle the optimal policy is a relaxed capital requirement. Finally, countries with a large amount of domestic capital are unaffected by capital requirements.

Keywords: Banking capital requirements; misallocation (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Date: 2016-07-12
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