The Procyclical Effects of Bank Capital Regulation
We compare various bank capital regulation regimes using a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle determines loans' probabilities of default. Banks hold endogenous capital buffers as a precaution against shocks that impair their future lending capacity. We find that Basel II is more procyclical than Basel I but makes banks safer, and it is generally superior in welfare terms. For high social costs of bank failure, the optimal capital requirements are higher but less cyclically varying, like those currently targeted by Basel III. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
Year of publication: |
2013
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Authors: | Repullo, Rafael ; Suarez, Javier |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 26.2013, 2, p. 452-490
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Publisher: |
Society for Financial Studies - SFS |
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