Bank Capital in the Short and in the Long Run

42 Pages Posted: 1 Aug 2018

See all articles by Caterina Mendicino

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Kalin Nikolov

European Central Bank (ECB)

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Dominik Supera

University of Pennsylvania - The Wharton School

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2017

Abstract

How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.

Keywords: Macroprudential Policy, Bank Fragility, Financial Frictions, Default Risk, Effective Lower Bound, Transition Dynamics

JEL Classification: E3, E44, G01, G21

Suggested Citation

Mendicino, Caterina and Nikolov, Kalin and Suarez, Javier and Supera, Dominik, Bank Capital in the Short and in the Long Run (January 1, 2017). Available at SSRN: https://ssrn.com/abstract=3213292 or http://dx.doi.org/10.2139/ssrn.3213292

Caterina Mendicino (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Dominik Supera

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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