Macroeconomics of Bank Capital and Liquidity Regulations

45 Pages Posted: 19 Dec 2016  

Frédéric Boissay

Bank for International Settlements (BIS)

Fabrice Collard

University of Berne - Department of Economics

Date Written: December 2016

Abstract

We study the transmission mechanisms of liquidity and capital regulations as well as their effects on the economy and welfare. We propose a macro-economic model in which a regulator faces the following trade-off. On the one hand, banking regulations may reduce the aggregate supply of credit. On the other hand, they promote the allocation of credit to its best uses. Accordingly, in a regulated economy there is less, but more productive lending. Based on a version of the model calibrated on US data, we find that both liquidity and capital requirements are needed, and must be set relatively high. They also mutually reinforce each other, except when liquid assets are scarce. Our analysis thus provides broad support for Basel III's "multiple metrics" framework.

Keywords: Financial frictions, externalities, banking regulation

JEL Classification: E60, G18, G28

Suggested Citation

Boissay, Frédéric and Collard, Fabrice, Macroeconomics of Bank Capital and Liquidity Regulations (December 2016). BIS Working Paper No. 596. Available at SSRN: https://ssrn.com/abstract=2887344

Frédéric Boissay (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Fabrice Collard

University of Berne - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

HOME PAGE: http://fabcol.free.fr

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