Financial Regulation in a Quantitative Model of the Modern Banking System

Juliane Begenau and Tim Landvoigt
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Juliane Begenau: Harvard University
Tim Landvoigt: University of TX

Research Papers from Stanford University, Graduate School of Business

Abstract: How does the shadow banking system respond to changes in the capital regulation of commercial banks? We propose a tractable, quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulatory policy. Tightening the capital requirement from the status quo creates a safer banking system despite more shadow banking activity. A reduction in aggregate liquidity provision decreases the funding costs of all banks, raising profits and reducing risk-taking incentives. Calibrating the model to data on financial institutions in the U.S., we find the optimal capital requirement is around 15%.

Date: 2017-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3558

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