scholarly journals Would Stricter Capital Requirements Raise the Cost of Capital? Bank Capital Regulation and the Low Risk Anomaly

2013 ◽  
Author(s):  
Malcolm P. Baker ◽  
Jeffrey A. Wurgler
Keyword(s):  
Cost Of Capital ◽  
Capital Requirements ◽  
Low Risk ◽  
Capital Regulation ◽  
Bank Capital ◽  
Bank Capital Regulation ◽  
The Cost

scholarly journals A Macroeconomic Model With Financially Constrained Producers and Intermediaries

Econometrica ◽  
2021 ◽  
Vol 89 (3) ◽  
pp. 1361-1418
Author(s):  
Vadim Elenev ◽  
Tim Landvoigt ◽  
Stijn Van Nieuwerburgh
Keyword(s):  
Financial Crises ◽  
Capital Requirements ◽  
Financial Fragility ◽  
Financial Intermediaries ◽  
Capital Regulation ◽  
Sharp Change ◽  
Bank Capital ◽  
Financial Firms ◽  
Bank Capital Regulation

How much capital should financial intermediaries hold? We propose a general equilibrium model with a financial sector that makes risky long‐term loans to firms, funded by deposits from savers. Government guarantees create a role for bank capital regulation. The model captures the sharp and persistent drop in macro‐economic aggregates and credit provision as well as the sharp change in credit spreads observed during financial crises. Policies requiring intermediaries to hold more capital reduce financial fragility, reduce the size of the financial and non‐financial sectors, and lower intermediary profits. They redistribute wealth from savers to the owners of banks and non‐financial firms. Pre‐crisis capital requirements are close to optimal. Counter‐cyclical capital requirements increase welfare.

Capital Regulation and Bank Deposits*

2018 ◽  
Vol 23 (4) ◽  
pp. 831-853 ◽  
Author(s):  
Stefan Arping
Keyword(s):  
Recent Literature ◽  
Capital Requirements ◽  
Capital Regulation ◽  
Crowding Out ◽  
Bank Capital ◽  
Bank Deposits ◽  
Small Rise ◽  
The Cost

Abstract Recent literature suggests that higher capital requirements for banks might lead to a socially costly crowding out of deposits by equity. This paper shows that additional equity in banks can help to crowd in deposits. Intuitively, as banks have more equity and become safer, the cost of deposit funding may decline; this, in turn, can encourage banks to expand their deposits. However, I also find that, for this effect to occur, capital requirements may have to be stringent enough: When bank capital is low, a small rise in capital requirements can cause banks to substitute equity for deposits. Overall, a non-monotonic relationship between the required amount of equity in banks and their level of deposit funding obtains.

Part I The Elements of Bank Financial Supervision, 2 Why Are Banks Supervised?

2018 ◽  
Author(s):  
Gleeson Simon
Keyword(s):  
Capital Requirements ◽  
Financial Supervision ◽  
Capital Regulation ◽  
Bank Capital ◽  
Banking Supervision ◽  
Risk Capital ◽  
The Public ◽  
Bank Capital Regulation ◽  
Bank Risks ◽  
Macroeconomic Environment

This chapter begins by setting out the Core Principles for Effective Banking Supervision produced by the Basel Committee in September 1997, reissued in a revised version in October 2006, and further revised in the light of the crisis in 2012. The 2012 revision of these principles focused on four major areas: corporate governance within banks; an obligation on supervisors to ensure that banks are appropriately prepared for resolution; an obligation for supervisors to assess bank risks in the context of the macroeconomic environment; and the idea that supervisors should have higher expectations of banks which are globally systemically significant than for other banks. The discussions then turn to capital regulation, constraints on bank capital regulation, quantum of bank capital requirements, whether the banking crisis proves that risk capital-based regulation failed, market crisis and regulation, and protecting the public from the consequences of bank failure.

scholarly journals The Rise of Shadow Banking: Evidence from Capital Regulation

2020 ◽  
Author(s):  
Rustom M Irani ◽  
Rajkamal Iyer ◽  
Ralf R Meisenzahl ◽  
José-Luis Peydró
Keyword(s):  
Fixed Effects ◽  
Price Volatility ◽  
Capital Requirements ◽  
Capital Regulation ◽  
Shadow Banking ◽  
Bank Capital ◽  
Shadow Banks ◽  
Bank Capital Regulation ◽  
Corporate Loan ◽  
The U.S

Abstract We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention, particularly among loans with higher capital requirements and at times when capital is scarce, and nonbanks step in. This reallocation is associated with important adverse effects during the 2008 crisis: loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.

Regulating bank leverage

2018 ◽  
Vol 10 (2) ◽  
pp. 264-274 ◽  
Author(s):  
Alexander Bleck
Keyword(s):  
Design Methodology ◽  
Bank Regulation ◽  
Capital Requirements ◽  
Capital Regulation ◽  
Bank Capital ◽  
Content Type ◽  
Leverage Ratio ◽  
Risk Sensitive ◽  
Bank Capital Regulation ◽  
Ratio Rule

Purpose This paper aims to study the design of bank capital regulation and points out a conceptual downside of risk-sensitive regulation. The author argues that when a bank is better informed about its risk than the regulator, designing regulation is subject to the Lucas critique. The second-best regulation could be risk-insensitive, which provides an explanation for the leverage ratio as a backstop to risk-based capital requirements. This paper offers empirical predictions and implications for policy. Design/methodology/approach The argument in the paper is based on analytical results from mechanism design. Findings Optimal bank regulation could be risk-insensitive, as is observed in practice in the form of the leverage ratio rule. Originality/value Counter to conventional wisdom, the paper argues and provides a new explanation for why bank regulation should not be sensitive to the risk of the bank. The paper then offers empirical predictions and implications for policy.

scholarly journals International Prudential Regulation, Regulatory Risk and Cost of Bank Capital

2008 ◽  
Author(s):  
Phong T. H. Ngo
Keyword(s):  
Financial Integration ◽  
Cost Of Capital ◽  
Capital Requirements ◽  
Bank Capital ◽  
Basel Accord ◽  
Regulatory Standards ◽  
Capital Ratios ◽  
Regulated Firm ◽  
The Cost ◽  
Positive Spillovers

We define regulatory risk as regulation that leads to an increase in the cost of capital for a regulated firm. In a general equilibrium setting, scholars have shown that uniform increases in capital requirements lead to an increase in the cost of capital. We extend their model to show that when regulatory standards differ across countries, financial integration leads to positive spillovers that reduce the cost of capital mark up for a given increase in bank capital. Accordingly, regulatory risk may be greater under a regulatory agreement such as the Basel Accord, which imposes international uniformity in capital ratios.  

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