Macroprudential regulation and misallocation

In this paper, we study the macroeconomic effects of  banking capital requirements. We provide a theoretical explanation for why decreasing capital requirements may lead to lower average leverage ratio among banks. This counterintuitive result is an outcome of the general equilibrium effects on inte...

Full description

Autores:
Hill, Enoch
Pérez Reyna, David Alejandro
Tipo de recurso:
Work document
Fecha de publicación:
2016
Institución:
Universidad de los Andes
Repositorio:
Séneca: repositorio Uniandes
Idioma:
eng
OAI Identifier:
oai:repositorio.uniandes.edu.co:1992/8662
Acceso en línea:
http://hdl.handle.net/1992/8662
Palabra clave:
Banking capital requirements
Misallocation
Capital bancario
Asignación de recursos
Tasas de interés
E44, G21, G28
Rights
openAccess
License
http://creativecommons.org/licenses/by-nc-nd/4.0/
Description
Summary:In this paper, we study the macroeconomic effects of  banking capital requirements. We provide a theoretical explanation for why decreasing capital requirements may lead to lower average leverage ratio among banks. This counterintuitive result is an outcome of the general equilibrium effects on interest rates, which affects capital allocation across different types of banks. Additionally, we find that the optimal policy for capital requirements depends on the available equity in the banking sector. Countries with a relatively undeveloped financial sector should have a higher capital requirement. For countries in the middle the optimal policy is a relaxed capital requirement. Finally, countries with a large amount of domestic capital are unaffected by capital requirements.