Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336329 
Authors: 
Year of Publication: 
2021
Citation: 
[Journal:] Latin American Journal of Central Banking (LAJCB) [ISSN:] 2666-1438 [Volume:] 2 [Issue:] 3 [Article No.:] 100038 [Year:] 2021 [Pages:] 1-19
Publisher: 
Elsevier, Amsterdam
Abstract: 
Capital requirements involve a trade-off between financial intermediation and financial stability. I analyze this trade-off in a macroeconomic model that allows for systemic bank runs, à la Gertler and Kiyotaki (2015). I show that fixed capital requirements make the economy more prone to runs because they slow down the recovery and reduce welfare compared to the laissez-faire benchmark. On the other hand, appropriately chosen countercyclical capital requirements can increase financial stability and welfare. To weigh the costs and benefits of this policy, I estimate the probability of a systemic shock to the financial sector using a novel measure derived from CDS data and find it to be around 0.5% per year prior to the 2007-09 financial crisis. I then show that implementing a countercyclical capital requirement that would have prevented the run on repo markets in 2008 would have cost 3% of steady-state bank capital and less than 0.1% in consumption terms.
Subjects: 
Financial crises
Bank runs
Capital requirements
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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