Risky Bank Lending and Optimal Capital Adequacy Regulation

We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending. Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth. The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses. Their main response is to raise lending rates to rebuild net worth. Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare. But the gains from eliminating limited liability and moral hazard would be an order of magnitude larger.
Publication date: June 2011
ISBN: 9781455259359
$18.00
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Economics- Macroeconomics , Economics / General , International - Economics , capital adequacy , banking , capital goods , bankers , bank capital , bank lending , capital losses , capital adequacy ratio , deposit insurance , banking sector , bank balance sheets , bank equity , prudential regulation , banker , banking sectors , capital stock , bank deposits , capita

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