Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking

51 Pages Posted: 2 Sep 2011 Last revised: 26 Dec 2019

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Andrea Gamba

University of Warwick - Finance Group

Marcella Lucchetta

Ca Foscari University of Venice

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Date Written: February 13, 2012

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.

Keywords: Capital requirements, liquidity requirements, taxation of liabilities

JEL Classification: G21, G28

Suggested Citation

De Nicolo, Gianni and Gamba, Andrea and Lucchetta, Marcella, Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking (February 13, 2012). European Banking Center Discussion Paper No. 2011-025; WBS Finance Group Research Paper No. 168. Available at SSRN: https://ssrn.com/abstract=1908201 or http://dx.doi.org/10.2139/ssrn.1908201

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
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CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Marcella Lucchetta

Ca Foscari University of Venice ( email )

Venice
Italy

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