Bank Capital in the Short and in the Long Run

35 Pages Posted: 29 May 2019

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: May 24, 2019

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 also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements.

Keywords: macroprudential policy, default risk, effective lower bound, transitional 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 (May 24, 2019). ECB Working Paper No. 2286 (2019); ISBN 978-92-899-3548-7 . Available at SSRN: https://ssrn.com/abstract=3394774

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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