Microprudential Regulation in a Dynamic Model of Banking

Review of Financial Studies, Forthcoming

AEA 2014 Philadelphia Meeeting Paper

WBS Finance Group Research Paper No. 204

57 Pages Posted: 13 May 2013 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

Date Written: February 11, 2014

Abstract

This paper studies the quantitative impact of microprudential bank regulations on bank lending and value metrics of efficiency and welfare in a dynamic model of banks that are financed by debt and equity, undertake maturity transformation, are exposed to credit and liquidity risks, and face financing frictions. We show that: (a) there exists an inverted U–shaped relationship between bank lending, welfare, and capital requirements; (b) liquidity requirements unambiguously reduce lending, efficiency and welfare; and (c) resolution policies contingent on observed capital, such as prompt corrective action, dominate in efficiency and welfare terms (non–contingent) capital and liquidity requirements.

Keywords: Bank Regulation, Dynamic Banking Model

JEL Classification: G21, G28, G33

Suggested Citation

De Nicolo, Gianni and Gamba, Andrea and Lucchetta, Marcella, Microprudential Regulation in a Dynamic Model of Banking (February 11, 2014). Review of Financial Studies, Forthcoming; WBS Finance Group Research Paper No. 204. Available at SSRN: https://ssrn.com/abstract=2263871 or http://dx.doi.org/10.2139/ssrn.2263871

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

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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