Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171960
Authors: 
Moyen, Stéphane
Schroth, Josef
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper 2017-6
Abstract: 
We study constrained-efficient bank capital regulation in a model with market-imposed equity requirements. Banks hold equity buffers to insure against sudden loss of access to funding. However, in the model, banks choose to only partially self-insure because equity is privately costly. As a result, equity requirements are occasionally binding. Constrained-efficient regulation requires banks to build up additional equity buffers and compensates them for the cost of equity with a permanent increase in lending margins. When buffers are depleted, regulation relaxes the market-imposed equity requirements by raising bank future prospects through temporarily elevated lending margins.
Subjects: 
Credit and credit aggregates
Financial institutions
Financial stability
Financial system regulation and policies
JEL: 
E13
E32
E44
Document Type: 
Working Paper

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