A Dynamic Model of Bank Behaviour under Multiple Regulatory Constraints

63 Pages Posted: 1 Feb 2019

See all articles by Markus Behn

Markus Behn

European Central Bank (ECB)

Claudio Daminato

Lund University; ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Carmelo Salleo

European Central Bank (ECB)

Date Written: January 31, 2019

Abstract

We develop a dynamic structural model of bank behaviour that provides a microeconomic foundation for bank capital and liquidity structures and analyses the effects of changes in regulatory capital and liquidity requirements as well as their interaction. Our findings suggest that adjustments in both types of requirements can have an impact on loan supply, with considerable heterogeneity across banks and over time. The model illustrates that banks' reactions depend on initial balance sheet conditions and reconciles evidence on short-term reductions in loan supply with findings suggesting that better capitalized banks are better able to lend in the medium- to long-term.

Keywords: bank regulation, capital structure, liquidity structure, structural model

JEL Classification: G21, G28, G32

Suggested Citation

Behn, Markus and Daminato, Claudio and Salleo, Carmelo, A Dynamic Model of Bank Behaviour under Multiple Regulatory Constraints (January 31, 2019). ECB Working Paper No. 2233 (2019); ISBN 978-92-899-3495-4 , Available at SSRN: https://ssrn.com/abstract=3327174 or http://dx.doi.org/10.2139/ssrn.3327174

Markus Behn (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Claudio Daminato

Lund University ( email )

Box 117
Lund, SC Skane S221 00
Sweden

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Carmelo Salleo

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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