The Procyclical Effects of Bank Capital Regulation

Repullo, Rafael; Suárez, Javier

doi:10.1093/rfs/hhs118

Cited by 315 publications

(199 citation statements)

References 52 publications

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“…Moreover, the values of annual unconditional default probabilities are in line with Repullo and Suarez (2012), who conduct a similar analysis of pro-cyclicality of the excess capital held by banks in a simple overlapping generation model. However, they do not consider the impact of regulatory penalties.…”

Section: Responses To Changes In Other Parameterssupporting

confidence: 55%

“…However, while yielding positive excess capital levels, these solutions are mechanical and lack realism in resembling true regulatory procedures used in case of a requirements' violation. A notable exception from this critique is a recent paper by Repullo and Suarez (2012), who obtain positive buers in a multiperiod setting, where banks cannot recapitalize on an ongoing basis. Positive excess capital emerges as a result of banks' precautionary strategy.…”

Section: Documents In Econstor Maymentioning

confidence: 99%

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Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital

Gornicka,

van Wijnbergen

2013

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The recent global nancial crisis, which is already being compared in magnitude and possible long-term consequences to the Great Depression, has exposed the weaknesses of nancial markets as well as their regulatory framework. In particular, it has become clear that minimum capital requirements in their current form are not sucient to keep banks from increased risk-taking and, as safety buers, to protect banks from default. The loss absorption capacity of the banking system is by now widely considered to be too low. Terms of use: Documents in EconStor mayIn addition, capital regulations may have even contributed to the severity of the recent crisis: it is widely accepted that capital requirements are pro-cyclical (Bec and Gollier (2009)), and thus amplify business cycle uctuations (Blum and Hellwig (1995), Kashyap and Stein (2004) and Heid (2007)). In the light of above considerations a major overhaul of the system of capital requirements and more generally of the structure 1 of bank regulation has been agreed upon and is to be implemented over the coming years (Basel Committee (2010)). Under Basel-III capital requirements will be tightened in various ways and a rst step has been made to create a less pro-cyclical regulatory framework. At the same time the plans to implement this new system have triggered a wide set of questions: will tightening requirements turn out to be an impediment for economic growth in the long term? Will it delay recovery in the short term? Will it reduce or even eliminate pro-cyclicality of the system? What will in fact be the impact on actual capital ratios? Will banks respond by increasing their capital or will they just absorb the new rules by lowering already existing buers they hold in excess of current regulatory ratios?While answers to most of these questions will require a general equilibrium framework, any general equilibrium eects will be triggered by changes in the banks' actual capital levels. In this paper we focus entirely on this issue, i.e. we investigate the direct impact of minimum requirements on banks' capital choices, before general equilibrium eects come into play. We believe that a precise analysis of the actual capital's dynamics in presence of capital regulations is a necessary rst step towards further welfare analysis and policy implications. For example, if in equilibrium banks' actual capital responds more than one-to-one to a raise in minimum requirements, the pro-cyclical character of capital regulatio...

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Section: Responses To Changes In Other Parameterssupporting

confidence: 55%

Section: Documents In Econstor Maymentioning

confidence: 99%

Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital

Gornicka,

van Wijnbergen

2013

SSRN Journal

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“…This will make capital requirements even more procyclical inducing a reduction of the credit supply in down-turns and overshooting in an upturn (Repullo and Suarez, 2012). There is some empirical evidence on the effect of risk-weighted capital requirements for the U.S.; e.g., Hancock and Wilcox (1998) show that during the credit crunch period in the early 1990s, small banks shrank their loan portfolios more than large banks did and this had a larger effect on the real economy.…”

Section: Regulatory Policies and Reformmentioning

confidence: 99%

Bank Financing for SMEs – Lessons from the Literature

Beck

2013

Natl. Inst. econ. rev.

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Abstract: This paper surveys the recent literature on the relationship between SMEs, financial deepening and economic development. While a large SME sector is not associated with faster economic growth or poverty alleviation, financial deepening can have a progrowth and pro-poor impact by disproportionally alleviating SMEs' financing constraints, enabling new entry of firms and entrepreneurs, and better resource allocation. It is important to differentiate between different segments of the SME population, most critically between subsistence micro entrepreneurs and transformational entrepreneurs. There is strong evidence that long-term institution building, including contractual and information frameworks, contribute to easing SMEs' financing constraints, with supportive evidence for specific policy interventions. There is no unambiguous evidence on the relationship between market structure and SMEs' access to finance. Foreign-owned and larger banks are as likely to cater to SMEs as smaller and local banks, but using different lending techniques and where the necessary institutional framework is in place in the country. There is also evidence that SMEs are more strongly affected by banking crises and that regulatory policies have important repercussions for SME lending. Permanent repository link:

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“…The closest paper is Repullo and Suarez (2013). In contrast with our static setup, they consider a dynamic model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is modeled as a two-state Markov process that determines the loans'probabilities of default.…”

Section: Introductionmentioning

confidence: 99%

Cyclical adjustment of capital requirements: A simple framework

Repullo

2013

Journal of Financial Intermediation

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We present a model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements.JEL classification: G21, G28, E44

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The Procyclical Effects of Bank Capital Regulation

Cited by 315 publications

References 52 publications

Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital

Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital

Bank Financing for SMEs – Lessons from the Literature

Cyclical adjustment of capital requirements: A simple framework

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