Leverage Constraints and Bank Monitoring: Bank Regulation versus Monetary Policy

CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 21/358, June 2021

63 Pages Posted: 23 Jul 2021

See all articles by Florian Böser

Florian Böser

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: June 30, 2021

Abstract

Bank leverage constraints can emerge from regulatory capital requirements as well as from central bank collateral requirements in reserve lending facilities. While these two channels are usually examined separately, we are able to compare them with the help of a bank money creation model in which central bank reserves have to be acquired to settle interbank liabilities. In particular, we show that with regard to bank monitoring, monetary policy via collateral requirements leads to a unique collateral leverage channel, which cannot be replicated by standard capital requirements. Through this channel, banks can expand loan supply and deposit issuance when they face liquidity constraints, by raising the collateral value of their loans with tighter monitoring of firms. The collateral leverage channel can improve welfare beyond standard bank capital regulation. Our results may inform current policy debates, such as the design of central bank collateral frameworks or the question whether monetary policy remains effective in times with large central bank reserves.

Keywords: leverage, banks, monitoring, bank regulation, monetary policy

JEL Classification: E42, E52, E58, G21

Suggested Citation

Böser, Florian and Gersbach, Hans, Leverage Constraints and Bank Monitoring: Bank Regulation versus Monetary Policy (June 30, 2021). CER-ETH – Center of Economic Research at ETH Zurich, Working Paper 21/358, June 2021, Available at SSRN: https://ssrn.com/abstract=3877234 or http://dx.doi.org/10.2139/ssrn.3877234

Florian Böser (Contact Author)

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

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Hans Gersbach

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

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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