Microprudential Regulation in a Dynamic Model of Banking

Nicoló, Gianni De; Gamba, Andrea; Lucchetta, Marcella

doi:10.2139/ssrn.2263871

Cited by 25 publications

(38 citation statements)

References 54 publications

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“…This paper builds on this work and develops a tractable macroeconomic framework with a focus on the eects of capital requirements. It is more closely related to work that quanties 8 the eects of capital requirements and leverage constraints, for instance Christiano and Ikeda (2013), Martinez-Miera and Suarez (2014), Van Den Heuvel (2008), Nguyen (2014), De Nicolò et al (2014, and Corbae and D'Erasmo (2012).…”

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confidence: 98%

Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model

Begenau

2015

SSRN Journal

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This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benet of higher capital requirements related to this channel signicantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.

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confidence: 98%

Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model

Begenau

2015

SSRN Journal

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“…A similar argument has been made byDe Nicolò, Gamba, and Lucchetta (2014).17 As market participants write CDS contracts on both banks and LFIs, this regulatory measure can be applied not only to banks, but to all financial institutions on which CDS contracts exist.18 Note that any market participant inside or outside the bank may enter into a CDS contract on the bank. We do not need to consider debt explicitly for our analysis, for an underlying is not a requisite for market participants to agree on a CDS contract.…”

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confidence: 85%

Implications of bank regulation for loan supply and bank stability: a dynamic perspective

Bucher

Dietrich

Hauck

2019

The European Journal of Finance

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Research Question Banks finance their loans and other assets with a combination of external finance in form of deposits and external equity as well as internal finance by gaining internal funds. Whereas the two types of external finance typically generate a trade-off between bank stability and loan supply due to different costs, we are interested in the impact of internal finance. Like external equity, internal funds improve the stability of banks, but unlike equity they are the outcome of a bank's past decisions on loan supply and capital structure. These decisions thus not only determine a bank's current stability, it also predetermines the future availability of internal funds, the future costs of external finance with deposits and external equity and a bank's vulnerability to future risks. Vice versa, expected future difficulties with respect to funding might affect a bank's lending and capital structure decision today. This paper sets out to understand the role of internal funds in this intertemporal link and the influence of bank regulation on the dynamics of loan supply and bank stability. Contribution In a theoretical partial equilibrium model, we study the decisions of a forward-looking bank over time with respect to its investment and capital structure. Taking the advantages of regulatory intervention as given, our approach is to identify the conditions under which different regulatory instruments can achieve bank stability and to assess the costs of doing so in terms of loan supply. We analyze the effects of risk-weighted capital-to-asset ratios and liquidity coverage ratios as well as regulatory margin calls, which is a theoretical proposal by Hart and Zingales (2011). Results Credit risk and financial frictions that cause debt to be cheaper than equity create an intratemporal and intertemporal trade-off between the stability of a bank and the efficiency of its loan supply. Internal funds may overcome this trade-off, but their availability is restricted. In this model framework, all regulatory instruments may increase bank stability for certain credit risks, but have distinctively different effects on loan supply. According to our model, risk-weighted capital-to-asset ratios may increase the volatility in loan supply. Liquidity coverage ratios may increase the volatility in loan supply as well, but in contrast to risk-weighted capital-to-asset ratios they never impose an additional restriction on loan supply of an already stable bank. Regulatory margin calls will also never change the loan supply if the bank chooses a safe capital structure. However, for high credit risks, it stops credit intermediation.

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“…This is because liquidity requirements constrain a bank's maturity transformation function, forcing it to under-invest in lending, over-invest in unproductive liquidity buffers, and suppress further net interest margins with resulting implications for investment, growth, plus the potential for making the shadow The research concludes that the decrease in lending procyclicality is distorted toward the up-side, extensively impeding credit provision. 52 More recent research has concluded that the attempt to make regulated banks less risky may actually raise their cost of capital, a heightened threat for the stability of the system. 53 Furthermore, if creditors view the new liquidity standards as detrimental for bank soundness, they can potentially respond negatively increasing their perceived default risk following the regulatory events.…”

Section: Profitability Incentives and Restrictions To Lendingmentioning

confidence: 99%

Insider perspectives on European banking challenges in the post-crisis regulation environment

Anagnostopoulos

Kabeega

2018

J Bank Regul

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Microprudential Regulation in a Dynamic Model of Banking

Cited by 25 publications

References 54 publications

Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model

Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model

Implications of bank regulation for loan supply and bank stability: a dynamic perspective

Insider perspectives on European banking challenges in the post-crisis regulation environment

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