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Bank capital shocks and countercyclical requirements: Implications for banking stability and welfare
Athens Univ Econ and Business, Greece; European Univ Inst, Italy.
Natl Inst Econ Res, Sweden.
Linköping University, Department of Management and Engineering, Economics. Linköping University, Faculty of Arts and Sciences.
2018 (English)In: Journal of Economic Dynamics and Control, ISSN 0165-1889, E-ISSN 1879-1743, Vol. 93, p. 315-331Article in journal (Refereed) Published
Abstract [en]

This paper incorporates anticipated and unanticipated shocks to bank capital into a DSGE model with a banking sector. We apply this model to study Basel III countercyclical capital requirements and their implications for banking stability and household welfare. We introduce three different countercyclical capital rules. The first countercyclical capital rule responds to credit to output ratio. The second countercyclical rule reacts to deviations of credit to its steady state, and the third rule reacts to credit growth. The second rule proves to be the most effective tool in dampening credit supply, housing demand and household debt as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio. After conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule, the baseline and the third rule respectively in terms of welfare accumulation. (C) 2018 Elsevier B.V. All rights reserved.

Place, publisher, year, edition, pages
ELSEVIER SCIENCE BV , 2018. Vol. 93, p. 315-331
Keywords [en]
Banking stability; Basel III; Capital requirements; News shocks; Welfare analysis
National Category
Economics
Identifiers
URN: urn:nbn:se:liu:diva-151210DOI: 10.1016/j.jedc.2018.01.049ISI: 000442061600018OAI: oai:DiVA.org:liu-151210DiVA, id: diva2:1248031
Note

Funding Agencies|Jan Wallanders and Tom Hedelius Foundation

Available from: 2018-09-13 Created: 2018-09-13 Last updated: 2018-09-13

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