The welfare cost of bank capital requirements |
| |
Authors: | Skander J Van den Heuvel |
| |
Institution: | Finance Department, The Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, USA |
| |
Abstract: | Capital requirements are the cornerstone of modern bank regulation, yet little is known about their welfare cost. This paper measures this cost and finds that it is surprisingly large. I present a simple framework, which embeds the role of liquidity creating banks in an otherwise standard general equilibrium growth model. A capital requirement limits the moral hazard on the part of banks that arises due to deposit insurance. However, this capital requirement is also costly because it reduces the ability of banks to create liquidity. The key insight is that equilibrium asset returns reveal the strength of households’ preferences for liquidity and this allows for the derivation of a simple formula for the welfare cost of capital requirements that is a function of observable variables only. Using US data, the welfare cost of current capital adequacy regulation is found to be equivalent to a permanent loss in consumption of between 0.1% and 1%. |
| |
Keywords: | Capital requirements Bank capital Welfare Liquidity |
本文献已被 ScienceDirect 等数据库收录! |
|