Systemic Capital Requirements

Macroprudential capital requirements and systemic risk

In the aftermath of the financial crisis, there is interest in reforming bank regulation such that capital requirements are more closely linked to a bank’s contribution to the overall risk of the financial system. In our paper we compare alternative mechanisms for allocating the overall risk of a banking system to its member banks. We explicitly take into account that overall risk as well as ea...

The Disturbing Interaction Between Countercyclical Capital Requirements and Systemic Risk

We consider an economy in which flat capital requirements are costly because they inefficiently reduce lending when aggregate conditions are unfavorable. Countercyclical capital requirements – which impose lower capital demands in bad aggregate states – have the potential to improve welfare. However, we show that such capital requirements also have a cost as they increase systemic risk taking a...

Social Capital and Systemic Competitiveness

The Welfare Cost of Bank Capital Requirements

This paper measures the welfare cost of bank capital requirements and finds that it is surprisingly large. I present a simple framework which embeds the role of liquidity creating banks in an otherwise standard general equilibrium growth model. A capital requirement plays a role, as it limits the moral hazard on the part of banks that arises due to the presence of a deposit insurance scheme. Ho...

An Analysis of VaR-based Capital Requirements∗

We study the dynamic investment and reporting problem of a financial institution subject to capital requirements based on self-reported VaR estimates, as in the Basel Committee’s Internal Models Approach (IMA). With constant price coefficients, we show that optimal portfolios display a local three-fund separation property. VaR-based capital requirements induce financial institutions to tilt the...