Cyclical Implications of Changing Bank Capital Requirements in a Macroeconomic Framework

Topics:
Commercial Banking,
Commercial Lending
Tags:
Bank,
Financial Services,
Government,
IMF,
Regulations,
Requirement
Source:
International Monetary Fund

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Overview: The paper presents an inter-temporal general equilibrium framework that accounts for such effects and evaluates the optimal responses to loan supply and productivity (loan demand) shocks. It shows that when loan supply is reduced, increasing the capital requirement allows a faster recovery of households' savings, loans, and output than a flat capital requirement policy. It also shows that if productivity reductions are anticipated-rather than unanticipated-by regulators, lowering the capital requirement preemptively enhances welfare through greater inter-temporal smoothing of households' consumption and deposit holdings.

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Format: PDF | Size: 494KB | Date: Aug 2005 | Pages: 36

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