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
July 2, 2014
We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from outside investors. 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 private perspective than socially valuable banking activities. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various institutions in the financial system.
Number of Pages in PDF File: 44
Keywords: capital requirements, macroprudential regulation, banks, competition, shadow banks
JEL Classification: G21, G28working papers series
Date posted: July 19, 2014
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