Dynamic Bank Capital Requirements

79 Pages Posted: 21 Feb 2018 Last revised: 23 Jun 2019

See all articles by Tetiana Davydiuk

Tetiana Davydiuk

Carnegie Mellon University - David A. Tepper School of Business

Date Written: October 1, 2017

Abstract

Basel III requires countercyclical capital buffers to protect the banking system from periods of excessive credit growth and leverage buildup. In this paper, I provide a rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 5% and 7% and depends on economic growth, bank credit, and asset prices. The welfare gain from implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.

Keywords: Capital requirements, Ramsey policy, bank credit, liquidity provision

JEL Classification: G20, G21, G28

Suggested Citation

Davydiuk, Tetiana, Dynamic Bank Capital Requirements (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=3110800 or http://dx.doi.org/10.2139/ssrn.3110800

Tetiana Davydiuk (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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