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Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications

Ming-Fu Shaw (), Juin-jen Chang and Hung-Ju Chen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops an analytically tractable dynamic general-equilibrium model with a banking system to examine the macroeconomic implications of capital adequacy requirements. In contrast to the hypothesis of a credit crunch, we find that increasing the strength of bank capital requirements does not necessarily reduce the equilibrium quantity of loans, provided that banks have the option to respond to the capital requirements by accumulating more equity instead of cutting back on lending. Accordingly, we show that there is an inverted-U-shaped relationship between CAR and capital accumulation (and consumption). Furthermore, the optimal capital adequacy ratio for social-welfare maximization is lower than that for capital-accumulation maximization. In accordance with general empirical findings, the capital- accumulation maximizing capital adequacy ratio is procyclical with respect to economic conditions. We also find that monetary policy affects the real macroeconomic activities via the so-called bank lending channel, but the effectiveness of monetary policy is weakened by bank capital requirements.

Keywords: Banking capital regulation; bank lending channel; the loan-deposit rate (search for similar items in EconPapers)
JEL-codes: E5 O4 (search for similar items in EconPapers)
Date: 2012-09-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Capital adequacy and the bank lending channel: Macroeconomic implications (2013) Downloads
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