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Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of BankingGianni De NicoloInternational Monetary Fund and CESifo Andrea GambaWarwick Business School - University of Warwick Marcella LucchettaCa Foscari University of Venice February 13, 2012 European Banking Center Discussion Paper No. 2011-025 CentER Working Paper Series No. 2011-090 Abstract: This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities.
Number of Pages in PDF File: 51 Keywords: Capital requirements, liquidity requirements, taxation of liabilities JEL Classification: G21, G28 working papers seriesDate posted: September 2, 2011 ; Last revised: February 22, 2012Suggested CitationContact Information
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