Financial Regulation in a Quantitative Model of the Modern Banking System

59 Pages Posted: 17 Mar 2016 Last revised: 3 Feb 2021

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Tim Landvoigt

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 3, 2021

Abstract

How does the shadow banking system respond to changes in capital regulation of commercial banks? We propose a quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulation. Tighter capital requirements for regulated banks cause higher liquidity premia, leading to higher shadow bank leverage and a larger shadow banking sector. At the same time, tighter regulation eliminates implicit subsidies to regulated banks and improves the competitive position of shadow banks, reducing their incentives for risk taking. The net effect is a safer financial system with more shadow banking. Calibrating the model to data on financial institutions in the U.S., the optimal capital requirement is around 16%.

Keywords: Shadow Banks, Liquidity Demand, Capital Requirement, Bank Regulation

JEL Classification: E44, G21, G28

Suggested Citation

Begenau, Juliane and Landvoigt, Tim, Financial Regulation in a Quantitative Model of the Modern Banking System (February 3, 2021). Available at SSRN: https://ssrn.com/abstract=2748206 or http://dx.doi.org/10.2139/ssrn.2748206

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tim Landvoigt

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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