Optimal Regulation of Bank Capital and Liquidity: How to Calibrate New International Standards

Abstract

Raising capital adequacy standards and introducing binding liquidity requirements can have beneficial effects if they reduce the probability of a costly financial crisis, but may also reduce GDP by raising borrowing costs for households and companies. In this paper, we estimate both benefits and costs of raising capital and liquidity, with the benefits being in terms of reduction in the probability of banking crises, while the costs are defined in terms of the economic impact of higher spreads for bank customers. We note that both of these results are contrary to the Modigliani-Miller theorem of irrelevance of the debt-equity choice. The result shows a positive net benefit from regulatory tightening, for a range of 2-6 percentage points increase in capital and liquidity ratios, depending on underlying assumptions.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 79 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.