Cyclical Effects of Bank Capital Requirements with Imperfect Credit Markets

55 Pages Posted: 20 Apr 2016

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Luiz A. Pereira da Silva

Bank for International Settlements (BIS)

Date Written: September 1, 2009

Abstract

This paper analyzes the cyclical effects of bank capital requirements in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on firms' effective collateral. Basel I- and Basel II-type regulatory regimes are defined and a capital channel is introduced through a signaling effect of capital buffers on the cost of bank deposits. The macroeconomic effects of various shocks (a drop in output, an increase in the refinance rate, and a rise in the capital adequacy ratio) are analyzed, under both binding and nonbinding capital requirements. Factors affecting the procyclicality of each regime (defined in terms of the behavior of the risk premium) are also identified and policy implications are discussed.

Keywords: Banks & Banking Reform, Access to Finance, Economic Theory & Research, Currencies and Exchange Rates, Debt Markets

Suggested Citation

Agenor, Pierre-Richard and Pereira da Silva, Luiz A., Cyclical Effects of Bank Capital Requirements with Imperfect Credit Markets (September 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN: https://ssrn.com/abstract=1484552

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Luiz A. Pereira da Silva

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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