Macroeconomic Shocks and Banking Regulation |
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Authors: | MATHIAS DEWATRIPONT JEAN TIROLE |
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Institution: | 1. Mathias Dewatripont is Executive Director, Banque Nationale de Belgique, and Professor of Economics, Université Libre de Bruxelles (ECARES and Solvay Brussels School) (E‐mail: mathias.dewatripont@nbb.be;2. mdewat@ulb.ac.be). Jean Tirole is President, Toulouse School of Economics (E‐mail: jean.tirole@tse‐fr.eu). |
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Abstract: | The recent crisis has brought to the fore the cyclical properties of banking regulation. Countercyclical buffers and enhanced capital requirements meant to stabilize banks’ balance sheets across the cycle are not costless, and a delicate balance needs to be reached between providing incentives to generate value and discouraging excessive risk taking. The paper develops a model in which, in contrast with Modigliani–Miller, outside equity and capital requirements matter. It analyses banking regulation in the presence of macroeconomic shocks and studies the desirability of self‐insurance mechanisms such as countercyclical capital buffers or dynamic provisioning, as well as “macro‐hedges” such as CoCos and capital insurance. |
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Keywords: | E32 G21 G28 banking regulation macroeconomic shocks countercyclical capital requirements |
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