Macroprudential Bank Capital Regulation in a Competitive Financial System
University of Chicago - Finance
Christian C. Opp
University of Pennsylvania - The Wharton School
Marcus M. Opp
University of California, Berkeley - Finance Group
October 9, 2014
We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from public markets. 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 to engage in value-destroying risk-shifting. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various players in the financial system.
Number of Pages in PDF File: 44
Keywords: capital requirements, macroprudential regulation, banks, competition, public capital markets
JEL Classification: G21, G28
Date posted: July 19, 2014 ; Last revised: October 10, 2014
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