Premium
Bank Capital Requirements and Collateralised Lending Markets
Author(s) -
Rubio Margarita,
Carrascogallego José A.
Publication year - 2017
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12182
Subject(s) - basel iii , capital requirement , basel ii , economics , basel i , risk weighted asset , dynamic stochastic general equilibrium , risk adjusted return on capital , monetary economics , capital (architecture) , capital adequacy ratio , welfare , financial system , monetary policy , financial capital , capital formation , microeconomics , market economy , profit (economics) , archaeology , history , incentive
In this paper, we take as a baseline a dynamic stochastic general equilibrium (DSGE) model, which features a housing market, borrowers, savers and banks, in order to evaluate the welfare and macroeconomic effects of the new fixed capital requirements in the Basel accords. Our results show that the higher capital requirements imposed by Basel I, II and III decrease both the quantity of borrowing and its variability, producing distributional welfare effects among agents: savers are better off, but borrowers and banks are worse off. Then, we propose a macroprudential rule for the countercyclical capital buffer of Basel III in which capital requirements respond to credit growth, output and housing prices. We find that the optimal implementation of Basel III is countercyclical for borrowers and banks, the agents directly affected by capital requirements, while procyclical for savers. From a normative perspective, we see that this macroprudential rule for Basel III delivers higher welfare for the society than a situation with no regulation. Keywords: Basel I, Basel II, Basel III, banking regulation, welfare, banking supervision, macroprudential, capital requirement ratio, credit, countercyclical capital buffer.