Abstract

http://ssrn.com/abstract=2181436
 
 

References (11)



 


 



Higher Capital Requirements, Safer Banks? Macroprudential Regulation in a Competitive Financial System


Milton Harris


University of Chicago - Finance

Christian C. Opp


University of Pennsylvania - The Wharton School

Marcus M. Opp


University of California, Berkeley - Finance Group

March 11, 2014


Abstract:     
We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from other investors, such as institutions in the shadow-banking system. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineffective but also imply that, over some ranges, increases in capital requirements cause more banks in the economy to engage in value-destroying risk-shifting. To avoid this perverse outcome, the regulator has to set capital requirements high enough, so that risk-shifting activities become less profitable from a banker's perspective than socially valuable banking activities. Our model generates a set of novel implications that highlight the intricate dependencies between optimal bank capital regulation and the comparative advantages of various institutions in the financial system.

Number of Pages in PDF File: 38

Keywords: Bank Capital Regulation, Shadow Banking System, Risk-shifting, Government Bailouts

JEL Classification: G28, G21, G12

working papers series


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Date posted: November 27, 2012 ; Last revised: July 17, 2014

Suggested Citation

Harris, Milton and Opp, Christian C. and Opp, Marcus M., Higher Capital Requirements, Safer Banks? Macroprudential Regulation in a Competitive Financial System (March 11, 2014). Available at SSRN: http://ssrn.com/abstract=2181436 or http://dx.doi.org/10.2139/ssrn.2181436

Contact Information

Milton Harris
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 702-2549 (Phone)
(773) 753-8310 (Fax)
HOME PAGE: http://faculty.chicagobooth.edu/milton.harris/

Chicago Booth School of Business Logo

Christian C. Opp (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3620 Locust Walk
2428 SH-DH
Philadelphia, PA 19104
United States
215-573-3186 (Phone)
Marcus M. Opp
University of California, Berkeley - Finance Group ( email )
Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
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