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Financial Regulation in a Quantitative Model of the Modern Banking System

61 Pages Posted: 17 Mar 2016 Last revised: 20 Apr 2017

Juliane Begenau

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

Tim Landvoigt

University of Pennsylvania - The Wharton School

Date Written: April 19, 2017

Abstract

How does the shadow banking system respond to changes in the capital regulation of commercial banks? We propose a tractable, quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulatory policy. Tightening the capital requirement from the status quo creates a safer banking system despite more shadow banking activity. A reduction in aggregate liquidity provision decreases the funding costs of all banks, raising profits and reducing risk-taking incentives. Calibrating the model to data on financial institutions in the U.S., we find the optimal capital requirement is around 15%.

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 (April 19, 2017). 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

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