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The effects of capital requirements on good and bad risk-taking

N. Aaron Pancost and Roberto Robatto

No 104, ESRB Working Paper Series from European Systemic Risk Board

Abstract: We study optimal capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. Firms hold deposits for precautionary reasons and to facilitate the acquisition of production inputs. Our theoretical analysis identifies a novel general equilibrium channel that operates through firms’ deposits and mitigates the cost of increasing capital requirements. We calibrate our model and find that the optimal capital requirement is 18.7% but only 13.6% in a comparable model in which only households hold deposits. Our novel channel accounts for most of the difference. JEL Classification: E21, G21, G32

Keywords: capital requirements; deposit insurance; idiosyncratic risk; safe assets (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-ias and nep-rmg
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Working Paper: The Effects of Capital Requirements on Good and Bad Risk Taking (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2019104

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