Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/236657 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9115
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
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, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
Subjects: 
bank capital requirements
credit crunch
systemic risk
JEL: 
E21
E32
F44
G21
G28
Document Type: 
Working Paper
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