Optimal Bank Regulation, the Real Sector, and the State of the Economy
Type
discussion paper
Date Issued
2016-08
Author(s)
Abstract
Concerns about the procyclicality of bank regulation have motivated recent reforms that include countercyclical measures. This paper analyzes how optimal capital requirements, which balance a trade-off between financial stability and investment of the real sector, adjust during a downturn. Adding an endogenous loan market reveals equilibrium effects that strongly influence the adjustment and allows studying the implications of real shocks. The results suggest a nuanced adjustment depending on the shock: In a capital crunch, capital requirements are relaxed to prevent a sharp decline in investment. If productivity decreases, they are tightened as preserving financial stability entails a smaller cost.
HSG Profile Area
SEPS - Economic Policy
Division(s)
Eprints ID
249136
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Name
D__My Documents_Papers_DP_OptAdjustment.pdf
Size
550.67 KB
Format
Adobe PDF
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