Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212174 
Year of Publication: 
2010
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 17/2010
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We show how banks excessive risk-taking, stemming from informational asymmetries in loan markets, can lead to an excessive output loss when a recession starts. Risk-based capital requirements can alleviate the output loss by reducing excessive risk-taking in normal times. Model simulations suggest that the differentiation of risk-weights in the Basel framework might be further increased in order to take full advantage of the allocational effects of capital requirements. Our analysis also provides a new rationale for the countercyclical elements of capital requirements.
Subjects: 
bank regulation
Basel III
capital requirements
credit risk
crises
procyclicality
JEL: 
D41
D82
G14
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-619-4
Document Type: 
Working Paper

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