Bank Capital Buffers in a Dynamic Model

43 Pages Posted: 23 Jan 2019 Last revised: 21 Feb 2019

See all articles by Jochen Mankart

Jochen Mankart

Deutsche Bundesbank Research Centre

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Spyros Pagratis

Athens University of Economics and Business, Assistant Professor

Multiple version iconThere are 3 versions of this paper

Date Written: 2018

Abstract

We estimate a dynamic structural banking model to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk-weighted capital requirements reduce loan supply and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Tighter leverage requirements, on the other hand, increase lending, preserve bank charter value and incentives to accumulate equity buffers, therefore leading to lower bank failure rates.

Keywords: Banking, Equity Buffers, Regulatory Interactions

JEL Classification: E44, G21, G38

Suggested Citation

Mankart, Jochen and Michaelides, Alexander and Pagratis, Spyros, Bank Capital Buffers in a Dynamic Model (2018). Deutsche Bundesbank Discussion Paper No. 51/2018. Available at SSRN: https://ssrn.com/abstract=3319218

Jochen Mankart (Contact Author)

Deutsche Bundesbank Research Centre ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Alexander Michaelides

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Spyros Pagratis

Athens University of Economics and Business, Assistant Professor ( email )

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