Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212381 
Year of Publication: 
2017
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 10/2017
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We consider optimal capital requirements for banks' lending activities when the potential trade-off between financial stability and economic (productivity) growth is taken into account. Both sides of the trade-off are affected by banks' credit allocation, which in turn is affected by the risk weights used to set capital requirements on bank loans. We find that when firms are credit constrained, the optimal risk weights are flatter than those that are only set to safeguard against bank failures and their social costs. This provides an additional rationale for capital requirements to be less 'risk-sensitive'. Differences in company productivity have a further effect on the profile of optimal risk weights, and may amplify the 'flattening' effect.
JEL: 
E44
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-162-7
Document Type: 
Working Paper

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