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Bank capital in the short and in the long run

Caterina Mendicino (), Kalin Nikolov (), Javier Suarez and Dominik Supera

No 2286, Working Paper Series from European Central Bank

Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements. JEL Classification: E3, E44, G01, G21

Keywords: default risk; effective lower bound; macroprudential policy; transitional dynamics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg and nep-mac
Date: 2019-05
Note: 1774743
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Working Paper: Bank Capital in the Short and in the Long Run (2018) Downloads
Working Paper: Bank Capital in the Short and in the Long Run (2018) Downloads
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