Shaw, Ming-fu and Chang, Juin-jen and Chen, Hung-Ju (2012): Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications.
Download (194kB) | Preview
This paper develops an analytically tractable dynamic general-equilibrium model with a banking system to examine the macroeconomic implications of capital adequacy requirements. In contrast to the hypothesis of a credit crunch, we find that increasing the strength of bank capital requirements does not necessarily reduce the equilibrium quantity of loans, provided that banks have the option to respond to the capital requirements by accumulating more equity instead of cutting back on lending. Accordingly, we show that there is an inverted-U-shaped relationship between CAR and capital accumulation (and consumption). Furthermore, the optimal capital adequacy ratio for social-welfare maximization is lower than that for capital-accumulation maximization. In accordance with general empirical findings, the capital- accumulation maximizing capital adequacy ratio is procyclical with respect to economic conditions. We also find that monetary policy affects the real macroeconomic activities via the so-called bank lending channel, but the effectiveness of monetary policy is weakened by bank capital requirements.
|Item Type:||MPRA Paper|
|Original Title:||Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications|
|English Title:||Capital Adequacy and the Bank Lending Channel: Macroeconomic Implications|
|Keywords:||Banking capital regulation; bank lending channel; the loan-deposit rate|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity
|Depositing User:||Hung-Ju Chen|
|Date Deposited:||05. Sep 2012 14:08|
|Last Modified:||14. Feb 2013 02:17|
Aliaga-Díaz, R.A., 2005, “General equilibrium implications of the capital adequacy regulation for banks,” Computing in Economics and Finance 238, Society for Computational Economics.
Basel Committee on Banking Supervision, 1999, “A new capital adequacy framework,” Basel Report, January, 1-62.
Berger, A. and G. Udell, 1994, “Did risk-based capital allocate bank credit and cause a ‘credit crunch’ in the U.S.?” Center for Financial Institutions Working Papers 94-07, The Wharton School Center for Financial Institutions, University of Pennsylvania.
Bernanke, B.S. and C.S. Lown, 1991, “The credit crunch,” Brookings Papers on Economic Activity 2, 205-39.
Bliss, R. and G. Kaufman, 2003, “Bank procyclicality, credit crunches, and asymmetric monetary policy effects: A unifying model,” Journal of Applied Finance, 23-31.
Blum, J. and M. Hellwig, 1995, “The macroeconomic implications of capital adequacy requirements for banks,” European Economic Review 39, 739-749.
Borio, C., 2003, “Towards a macroprudential framework for financial supervision and regulation,” CESifo Economics Studies 49, 181-215.
Dewatripont, M. and J. Tirole, 1994, The Prudential Regulation of Banks, Cambridge, Massachusetts, MIT Press.
Elyasiani, E., K.J. Kopecky, and D. VanHoose, 1995, “Costs of adjustment, portfolio separation, and the dynamic behavior of bank loans and deposits,” Journal of Money, Credit and Banking 27, 955-974.
Freixas, X. and J.C. Rochet, 1997, Microeconomics of Banking, Cambridge, MA: MIT Press.
Friedman, B., 1991, “Comments on Bernanke and Lown’s ‘The credit crunch’,” Brookings Papers on Economic Activity 2, 240-7.
Hall, M., 1993, Banking Regulation and Supervision: A Comparative Study of the UK, USA and Japan, Edward Elgar Publishing.
Hancock, D. and J.A. Wilcox, 1995, “Bank balance sheet shocks: Their dynamic effects on bank capital and lending,” Journal of Banking and Finance 19, 661-678.
Keeley, M.C. and F.T. Furlong, 1990, “A reexamination of mean-variance analysis of bank capital regulation,” Journal of Banking and Finance 14, 69-84.
Kim, D. and A.M. Santomero, 1988, “Risk in banking and capital regulation,” Journal of Finance 43, 1219-1233.
King R.G. and R. Levine, 1993a, “Finance, entrepreneurship, and growth: Theory and evidence,” Journal of Monetary Economics 32, 513-542.
King R.G. and R. Levine, 1993b, “Finance and growth: Schumpeter might be right,” Quarterly Journal of Economics 108, 717-737.
Klein, M., 1971, “A theory of the banking firm,” Journal of Money, Credit and Banking 3, 205-218. Koehn, M. and A.M. Santomero, 1980, “Regulation of bank capital and portfolio risk,” Journal of Finance 35, 1235-1250.
Kopecky, K.J. and D. VanHoose, 2004a, “A model of the monetary sector with and without binding capital requirements,” Journal of Banking and Finance 28, 633-646.
Kopecky, K.J. and D. VanHoose, 2004b, “Bank capital requirements and the monetary transmission mechanism,” Journal of Macroeconomics 26, 443-464.
Kopecky, K.J. and D. VanHoose, 2006, “Capital regulation, heterogeneous monitoring costs, and aggregate loan quality” Journal of Banking and Finance 30, 2235-2255.
Mayer, C., 1990, “Financial systems, corporate finance, and economic development,” in R.G. Hubbard (ed.), Asymmetric Information, Corporate Finance, and Investment, University of Chicago Press, Chicago IL, 307-32.
Modigliani, F. and M.H. Miller, 1958, “The cost of capital, corporate finance and the theory of investment,” American Economic Review 48, 261-297.
Peek, Joe and E.S. Rosengren, 1995a, “Bank regulation and the credit crunch,” Journal of Banking and Finance 19, 679-692.
Peek, Joe and E.S. Rosengren, 1995b, “The capital crunch: Neither a borrower nor a lender be,” Journal of Money, Credit, and Banking 27, 625-638.
Repullo, R., and J. Suarez, 2000, “Entrepreneurial moral hazard and bank monitoring: A model of the credit channel,” European Economic Review 44, 1931-1950.
Robinson, J., 1969, The Accumulation of Capital, 3rd ed. London, UK: Macmillan.
Santomero, A.M. and R. Watson, 1977, “Determining an optimal capital standard for the banking industry,” Journal of Finance 32, 1267-82.
Santos, J., 2001, “Bank capital regulation in contemporary banking theory: A review of the literature,” Financial Markets, Institutions, and Instruments 10, 41-84.
Seater, J.J., 2001, “Optimal bank regulation and monetary policy,” North Carolina State University, Mimeo.
Schmidt, R.H., 2001, “Differences between financial systems in European countries: Consequences for EMU,” in D. Bunderbank, ed., The Monetary Transmission Process: Recent Developments and Lessons for Europe. Hampshire: Palgrave Publishers.
Schumpeter, J.A. 1939. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York and London: McGraw-Hill.
Turnovsky, S.J., 1990, “The effects of taxes and dividend policy on capital accumulation and macroeconomic behavior,” Journal of Economic Dynamics and Control 14, 491-521.
Turnovsky, S.J., 1995, Methods of Macroeconomic Dynamics, MA, Cambridge: The MIT Press.
Van den Heuvel, S.J., 2008, “The welfare cost of bank capital requirements,” Journal of Monetary Economics 55, 298-320.
VanHoose, D., 2006, “Bank behavior under capital regulation: What does the academic literature tell us?” Networks Financial Institute 2006-WP-04.
Vinala, J. and A. Berges, 1988, Financial innovation and capital formation, In: Heertje, A. (Ed.), Innovation, Technology and Finance, Basil Blackwell, New York.