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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

Abstract: 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
Date: 2016
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) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:226

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