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Welfare analysis of bank capital requirements with endogenous default

Fernando Garcia-Barragan () and Guangling Liu ()

No 688, Working Papers from Economic Research Southern Africa

Abstract: This paper presents a tractable framework with endogenous default and evaluates the welfare implication of bank capital requirements. We analyze the response of social welfare to a negative technology shock under different capital requirement regimes with and without default. We show that including default as an additional indicator of capital requirements is welfare improving. When implementing capital requirements, a more aggressive reaction to the default rate is more effective for weakening the negative effect of the shock on welfare. Compared with output gap, the credit-to-output gap is a better indicator for implementing the countercyclical capital buffer.

Keywords: Bank capital requirement; Default; Welfare; DSGE (search for similar items in EconPapers)
JEL-codes: E44 E47 E58 G28 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-rmg
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Journal Article: Welfare analysis of bank capital requirements with endogenous default (2018) Downloads
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