Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/173845 
Year of Publication: 
2017
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-771
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
Subjects: 
Capital requirements
Bank risk-taking
Growth and welfare
JEL: 
E44
G28
O41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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