Financial Regulation in a Quantitative Model of the Modern Banking System
Event details
| Date | 29.04.2016 |
| Hour | 10:30 › 12:00 |
| Speaker | Juliane BEGENAU (Harvard Business School) |
| Location | |
| Category | Conferences - Seminars |
This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. In particular, we investigate how the shadow banking system responds to capital regulation for traditional banks. A key feature of our model are defaultable bank liabilities that provide liquidity services to households. The quality of the liquidity services provided by bank liabilities depends on their safety in case of default. Commercial bank debt is fully insured and thus provides full liquidity. However, commercial banks do not internalize the social costs of higher leverage in the form of greater bankruptcy losses (moral hazard), and are subject to a regulatory capital requirement. In contrast, shadow bank liabilities are generally uninsured, and their liquidity is limited by their positive probability of default. Shadow banks endogenously limit their leverage as they internalize its costs. Tightening the commercial banks' capital requirement from the status quo leads to safer commercial banks and more shadow banking activity in the economy. While the safety of the nancial system increases, it provides less liquidity. Calibrating the model to data from the Financial Accounts of the U.S., the optimal
capital requirement is around 15%.
capital requirement is around 15%.
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