Bank capital requirements and collateralised lending markets

Rubio, Margarita; Carrasco-Gallego, Jos� A.

Abstract

In this paper, we take as a baseline a dynamic stochastic general equilibrium (DSGE) model, which features a housing market, borrowers, savers and banks, in order to evaluate the welfare and macroeconomic effects of the new fixed capital requirements in the Basel accords. Our results show that the higher capital requirements imposed by Basel I, II and III decrease both the quantity of borrowing and its variability, producing distributional welfare effects among agents: savers are better o¤, but borrowers and banks are worse o¤. Then, we propose a macroprudential rule for the counter- cyclical capital buffer of Basel III in which capital requirements respond to credit growth, output and housing prices. We find that the optimal implementation of Basel III is countercyclical for borrowers and banks, the agents directly affected by capital requirements, while procyclical for savers. From a normative perspective, we see that this macroprudential rule for Basel III delivers higher welfare for the society than a situation with no regulation.

Citation

Rubio, M., & Carrasco-Gallego, J. A. (2017). Bank capital requirements and collateralised lending markets. Manchester School, 85(S1), 79-103. https://doi.org/10.1111/manc.12182

• Journal Article Type: Article
• Acceptance Date: Nov 14, 2016
• Online Publication Date: Feb 8, 2017
• Publication Date: Sep 30, 2017
• Deposit Date: Nov 24, 2016
• Publicly Available Date: Feb 9, 2019
• Journal: Manchester School
• Print ISSN: 1463-6786
• Electronic ISSN: 1467-9957
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 85
• Issue: S1
• Pages: 79-103
• DOI: https://doi.org/10.1111/manc.12182
• Keywords: Basel I, Basel II, Basel III, Banking regulation, Welfare, Banking supervision, Macro- prudential, Capital requirement ratio, Credit, Countercyclical capital buffer
• Public URL: https://nottingham-repository.worktribe.com/output/885796
• Publisher URL: http://onlinelibrary.wiley.com/doi/10.1111/manc.12182/full
• Additional Information: This is the peer reviewed version of the following article: Rubio, M. and Carrasco-gallego, J. A. (2017), Bank Capital Requirements and Collateralised Lending Markets. The Manchester School. doi:10.1111/manc.12182 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/manc.12182/full This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
• Contract Date: Nov 24, 2016