We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases,...

Using detailed loan holding data of Collateralized Loan Obligations (CLOs), we document empirical evidence for systemic risk due to leverage constraints on CLOs. Constrained CLOs fire sell loans downgraded to CCC or below, and thus loans widely held by constrained CLOs experience temporarily...