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on Corporate Finance |
| By: | Karmakar, Sudipto |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare. |
| Keywords: | Capital Buffers, Prudential Regulation, Basel Core Banking Principles |
| JEL: | G01 G21 G28 |
| Date: | 2013–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52172&r=cfn |
| By: | Karmakar, Sudipto; Mok, Junghwan |
| Abstract: | This paper empirically evaluates the impact of bank capital on lending patterns of commercial banks in the United States. We construct an unbalanced quarterly panel of around seven thousand medium sized commercial banks over sixty quarters, from 1996 to 2010. Using two different measures of capital namely the capital adequacy ratio and tier 1 ratio, we find a moderate relationship between bank equity and lending. We also use an innovative instrumenting methodolgy which helps us overcome the endogeneity issues that are common in such analyses. Our results are broadly consistent with some other recent studies that have analyzed US banking data. |
| Keywords: | Bank Capital Buffers, Regulation, Risk Weighted Assets |
| JEL: | G21 G28 G32 |
| Date: | 2013–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52173&r=cfn |