Capital Regulation and Credit Fluctuations

Gersbach, Hans and Rochet, Jean-Charles (2017) Capital Regulation and Credit Fluctuations. Journal of Monetary Economics, 90. pp. 113-124.

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Credit cycle stabilization can be a rationale for imposing counter-cyclical capital requirements on banks. The model comprises two productive sectors: in one sector, firms can finance investments through a bond market. In the other, firms rely on bank credit. Financial frictions limit banks’ borrowing capacity. Aggregate shocks impact firms’ productivity. From a welfare perspective, banks lend too much in high productivity states and too little in bad states, although financial markets are complete. Imposing a (stricter) capital requirement in good states corrects capital misallocation, increases expected output and social welfare. Even with risk-neutral agents, stabilization of credit cycles is socially beneficial.

Item Type: Article
Language: English
Date: 2017
Refereed: Yes
Uncontrolled Keywords: Credit fluctuations, Macroprudential regulation, Sectoral misallocation of capital
JEL codes: D86 - Economics of Contract - Theory
G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Government Policy and Regulation
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 13 Apr 2018 14:58
Last Modified: 13 Apr 2018 14:58

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