Bank Capital Requirements: A Quantitative Analysis

Charles A. Dice Center Working Paper No. 2015-14

Fisher College of Business Working Paper No. 2015-03-14

Posted: 21 Nov 2013 Last revised: 20 Sep 2016

Thien Tung Nguyen

Ohio State University (OSU) - Department of Finance

Date Written: January 30, 2014

Abstract

This paper examines the welfare implications of bank capital requirements in a general equilibrium model in which a dynamic banking sector endogenously determines aggregate growth. Due to government bailouts, banks engage in risk-shifting, thereby depressing investment efficiency; furthermore, they over-lever, causing fragility in the financial sector. Capital regulation can address these distortions and has a first-order effect on both growth and welfare. In the model, the optimal level of minimum Tier 1 capital requirement is 8%, greater than that prescribed by both Basel II and III. Increasing bank capital requirements can produce welfare gains greater than 1% of lifetime consumption.

Keywords: Bank regulation, Capital requirements, Risk-shifting, Bailout guarantee, Basel II, Basel III

JEL Classification: G28, G21

Suggested Citation

Nguyen, Thien Tung, Bank Capital Requirements: A Quantitative Analysis (January 30, 2014). Charles A. Dice Center Working Paper No. 2015-14; Fisher College of Business Working Paper No. 2015-03-14. Available at SSRN: https://ssrn.com/abstract=2356043 or http://dx.doi.org/10.2139/ssrn.2356043

Thien Tung Nguyen (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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