Capital Requirements, Risk Taking and Welfare in a Growing Economy
Pierre-Richard Agénor () and
Luiz Awazu Pereira da Silva ()
Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester
The effects of capital requirements on risk taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
Pages: 37 pages
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp, nep-dge and nep-rmg
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Working Paper: Capital Requirements, Risk-Taking and Welfare in a Growing Economy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:226
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