Financial Regulation in a Quantitative Model of the Modern Banking System

76 Pages Posted: 17 Mar 2016 Last revised: 3 Oct 2018

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Tim Landvoigt

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

Date Written: September 24, 2018

Abstract

How does the shadow banking system respond to changes in capital regulation of commercial banks? We propose a tractable quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of capital requirements. Tightening the capital requirement from the status quo leads to a safer banking system despite riskier shadow banking activity. A reduction in aggregate liquidity provision decreases the funding costs of all banks, raising profits and investment. Calibrating the model to data on financial institutions in the U.S., the optimal capital requirement is around 17%.

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 (September 24, 2018). 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

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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