Capital regulation and monetary policy with fragile banks

Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements a...

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Bibliographic Details
Published inJournal of monetary economics Vol. 60; no. 3; pp. 311 - 324
Main Authors Angeloni, Ignazio, Faia, Ester
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.04.2013
Elsevier Sequoia S.A
Subjects
Capital ratios
Capital requirements
Debt management
Economic theory
Financial services
Leverage
Monetary economics
Monetary policy
Monetary theory
Productivity
Regulation
Regulation of financial institutions
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Summary:Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements amplify the cycle and are welfare detrimental. Within a class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage. [Display omitted] ► Macro model with banks. ► Bank runs and endogenous bank capital. ► Risk taking channel. ► Endogenous risk formation. ► Optimal anti-cyclical capital ratios
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2013.01.003