Abstract

https://ssrn.com/abstract=2460900
 
 

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How Does Macroprudential Regulation Change Bank Credit Supply?


Anil K. Kashyap


University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Dimitrios P. Tsomocos


University of Oxford - Said Business School and St. Edmund Hall; University of Oxford - Said Business School

Alexandros Vardoulakis


Board of Governors of the Federal Reserve System

May 1, 2014

Chicago Booth Research Paper No. 14-18
Saïd Business School WP 2014-6

Abstract:     
We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank’s leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.

Number of Pages in PDF File: 51

Keywords: Risk taking, Limited Liability, Bank Runs, Regulation, Capital, Liquidity

JEL Classification: E44, G01, G21, G28


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Date posted: July 1, 2014 ; Last revised: June 18, 2015

Suggested Citation

Kashyap, Anil K. and Tsomocos, Dimitrios P. and Vardoulakis, Alexandros, How Does Macroprudential Regulation Change Bank Credit Supply? (May 1, 2014). Chicago Booth Research Paper No. 14-18; Saïd Business School WP 2014-6. Available at SSRN: https://ssrn.com/abstract=2460900 or http://dx.doi.org/10.2139/ssrn.2460900

Contact Information

Anil K. Kashyap (Contact Author)
University of Chicago, Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)

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National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
Dimitrios P. Tsomocos
University of Oxford - Said Business School and St. Edmund Hall ( email ) ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

University of Oxford - Said Business School ( email ) ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

Alexandros Vardoulakis
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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