The Moderating Effects of Capital Regulation and Supervisory Power on the Risk-Sensitivity of Bank Capital Requirements

How much capital should financial intermediaries hold? We propose a general equilibrium model with a financial sector that makes risky long‐term loans to firms, funded by deposits from savers. Government guarantees create a role for bank capital regulation. The model captures the sharp and persistent drop in macro‐economic aggregates and credit provision as well as the sharp change in credit spreads observed during financial crises. Policies requiring intermediaries to hold more capital reduce financial fragility, reduce the size of the financial and non‐financial sectors, and lower intermediary profits. They redistribute wealth from savers to the owners of banks and non‐financial firms. Pre‐crisis capital requirements are close to optimal. Counter‐cyclical capital requirements increase welfare.

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Does the intensity of prudential regulation affect banks? Evidence from the 2007-2009 crises.

Journal of Governance and Regulation ◽

10.22495/jgr_v1_i3_p2 ◽

2012 ◽

Vol 1 (3) ◽

pp. 14-26 ◽

Cited By ~ 1

Author(s):

Isabel Argimon ◽

Gerard Arqué Castells ◽

Francesc Rodríguez Tous

Keyword(s):

Capital Requirements ◽

Capital Regulation ◽

Risk Sensitivity ◽

The European Union ◽

Regulatory Capital ◽

European Banks ◽

Observed Behaviour ◽

The Right ◽

Yearly Data ◽

Do So

The main objective of this research is to gather empirical evidence on the effects of more or less stringency and more or less risk sensitivity in regulatory capital requirements on the observed behaviour of European banks during the initial years of the financial crisis. To do so, we use the indices built in Argimón and Ruiz (2010), which capture such characteristics of capital regulation. We test their incidence using changes in yearly data for individual banks for 25 countries of the European Union covering the period 2007-2009. Our results show that more stringency and risk sensitivity in capital regulation resulted in higher capital increases, with limited effect on risk taking. However, for well capitalized banks, higher risk sensitivity resulted in higher capital and higher risk, thus requiring striking the right balance, so as to lead to increased stability.

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A Guide to Choosing Absolute Bank Capital Requirements

The New York University Salomon Center Series on Financial Markets and Institutions - Ratings, Rating Agencies and the Global Financial System ◽

10.1007/978-1-4615-0999-8_8 ◽

2002 ◽

pp. 117-138 ◽

Cited By ~ 1

Author(s):

Mark Carey

Keyword(s):

Capital Requirements ◽

Bank Capital ◽

Bank Capital Requirements

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Capital Regulation and Bank Deposits*

Review of Finance ◽

10.1093/rof/rfy019 ◽

2018 ◽

Vol 23 (4) ◽

pp. 831-853 ◽

Cited By ~ 1

Author(s):

Stefan Arping

Keyword(s):

Recent Literature ◽

Capital Requirements ◽

Capital Regulation ◽

Crowding Out ◽

Bank Capital ◽

Bank Deposits ◽

Small Rise ◽

The Cost

Abstract Recent literature suggests that higher capital requirements for banks might lead to a socially costly crowding out of deposits by equity. This paper shows that additional equity in banks can help to crowd in deposits. Intuitively, as banks have more equity and become safer, the cost of deposit funding may decline; this, in turn, can encourage banks to expand their deposits. However, I also find that, for this effect to occur, capital requirements may have to be stringent enough: When bank capital is low, a small rise in capital requirements can cause banks to substitute equity for deposits. Overall, a non-monotonic relationship between the required amount of equity in banks and their level of deposit funding obtains.

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