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Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title Capital Regulation and Credit Fluctuations
Organization Unit
Authors
  • Jean-Charles Rochet
  • Hans Gersbach
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
Journal Title Journal of Monetary Economics
Geographical Reach international
Volume 90
Page Range 113 - 124
Date 2017
Abstract Text We provide a rationale for imposing counter-cyclical capital ratios on banks. In our simple model, bankers cannot pledge the entire future revenues to investors, which limits borrowing in good and bad times. Complete markets do not sufficiently stabilize credit fluctuations, as banks allocate too much borrowing capacity to good states and too little to bad states. As a consequence, bank credit, output, capital prices or wages are excessively volatile. Imposing a (stricter) capital ratio in good states corrects the misallocation of the borrowing capacity, increases expected output and can be beneficial to all agents in the economy. Although in our economy, all agents are risk-neutral, counter-cyclical capital ratios are an effective stabilization tool. To ensure this effectiveness, capital ratios have to be based on ex ante equity capital, as classical capital ratios can be bypassed.
Related URLs
Digital Object Identifier 10.1016/j.jmoneco.2017.05.008
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