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...

History shows that prohibition diminishes the supply of capital and raises its returns. However, for value-added investors such as private equity investments, regulation potentially reduces capital quality. The regulatory measures introduced in Basel II Capital Framework and in the EU Capital...