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Bank Capital Buffers in a Dynamic Model

61 Pages Posted: 2 Dec 2014 Last revised: 26 Apr 2017

Jochen Mankart

Deutsche Bundesbank Research Centre

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Spyros Pagratis

Athens University of Economics and Business, Assistant Professor

Multiple version iconThere are 2 versions of this paper

Date Written: January 05, 2017

Abstract

We estimate a dynamic structural banking model to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk-weighted capital requirements reduce loan supply and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Tighter leverage requirements, on the other hand, increase lending, preserve bank charter value and incentives to accumulate equity buffers, therefore leading to lower bank failure rates.

Keywords: Banking, Equity Buffers, Regulatory Interactions, Dynamic Models

JEL Classification: E44, G21, G38

Suggested Citation

Mankart, Jochen and Michaelides, Alexander and Pagratis, Spyros, Bank Capital Buffers in a Dynamic Model (January 05, 2017). Available at SSRN: https://ssrn.com/abstract=2532875 or http://dx.doi.org/10.2139/ssrn.2532875

Jochen Mankart

Deutsche Bundesbank Research Centre ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Alexander Michaelides (Contact Author)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Spyros Pagratis

Athens University of Economics and Business, Assistant Professor ( email )

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