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A dynamic model of bank behaviour under multiple regulatory constraints

Markus Behn, Claudio Daminato and Carmelo Salleo

No 2233, Working Paper Series from European Central Bank

Abstract: We develop a dynamic structural model of bank behaviour that provides a microeconomic foundation for bank capital and liquidity structures and analyses the effects of changes in regulatory capital and liquidity requirements as well as their interaction. Our findings suggest that adjustments in both types of requirements can have an impact on loan supply, with considerable heterogeneity across banks and over time. The model illustrates that banks' reactions depend on initial balance sheet conditions and reconciles evidence on short-term reductions in loan supply with findings suggesting that better capitalized banks are better able to lend in the medium- to long-term. JEL Classification: G21, G28, G32

Keywords: bank regulation; capital structure; liquidity structure; structural model (search for similar items in EconPapers)
Date: 2019-01
Note: 2203070
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Handle: RePEc:ecb:ecbwps:20192233