Capital requirements, risk choice, and liquidity provision in a business-cycle model

By Juliane Begenau. Journal of Financial Economics, 2020

182 citations recorded by the source corpus.

This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7a57b22ee033568e6ba6584477acd786dd78da3b

Citations in the corpus

• Financial Regulation in a Quantitative Model of the Modern Banking System (2017, unknown): “Begenau (2015), Christiano and Ikeda (2013), Elenev, Landvoigt, and Van Nieuwerburgh (2015),”
• Capital Requirements in a Quantitative Model of Banking Industry Dynamics (2014, unknown): “Among others, see Aliaga-Diaz and Olivero [3], Begenau [8], Bianchi and Bigio [9], Clerc, et.”