TITLE

The Procyclical Effects of Bank Capital Regulation

AUTHOR(S)
Repullo, Rafael; Suarez, Javier
PUB. DATE
February 2013
SOURCE
Review of Financial Studies;Feb2013, Vol. 26 Issue 2, p452
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
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.
ACCESSION #
85099129

 

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