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Bank Capital, Liquidity and Systemic Risk

Jürgen Eichberger and Martin Summer ()

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation on systemic risk. In particular we can analyze the impact of regulation on contagious defaults arising from mutual credit relations. We show that the impact of capital adequacy on systemic stability is ambiguous and that systemic risk might actually increase as a consequence of imposing capital constraints on banks. Furthermore we analyze the indirect consequences of capital adequacy regulation that are transmitted to the real economy by their impact on equilibrium interbank rates and thus the opportunity costs of liquidity within the banking system.

Keywords: Capital Adequacy; Systemic Risk; Banking Regulation; Financial Stability (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Pages: 49
Date: 2004-05-03
New Economics Papers: this item is included in nep-fin
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Related works:
Journal Article: Bank Capital, Liquidity, and Systemic Risk (2005) Downloads
Working Paper: Bank capital, liquidity and systemic risk (2004) Downloads
Working Paper: Bank Capital, Liquidity and Systemic Risk (2004) Downloads
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