Reputation,risk-taking,and macroprudential policy |
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| Institution: | 1. Bangor University, UK;2. Southern Illinois University, Carbondale, IL, USA;1. The Office of the Comptroller of the Currency, U.S. Department of the Treasury, 400 7th St. SW, Washington, DC 20219, United States;2. The University of California, Los Angeles, 420 Westwood Plaza, Los Angeles, CA 90095, United States |
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| Abstract: | This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. In our model, unprofitable banks have strong incentives to invest in risky assets when macroeconomic fundamentals are good in order to avoid the stigma of being assessed as low ability by the market. We show that across-the-system countercyclical capital requirements that deter such gambling are constrained optimal when fundamentals are neither extremely weak nor extremely strong. |
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| Keywords: | Macroprudential policy Credit booms Bank capital regulation |
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