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Session Overview
Session
FIIT-1: Bank Capital
Time:
Saturday, 26/Aug/2017:
9:00am - 10:30am

Session Chair: Jan Pieter Krahnen, Goethe University Frankfurt
Location: O151

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Presentations

Bank Capital, Risk-Taking, and the Composition of Credit

Milton Harris1, Christian Opp2, Marcus Matthias Opp3

1University of Chicago; 2University of Pennsylvania; 3UC Berkeley

Discussant(s): Jongsub Lee (University of Florida)

We propose a general equilibrium framework to analyze the cross-sectional distribution of credit and its exposure to shocks to the financial system, such as changes to bank capital, capital requirements, and interest rates. We characterize how over- and underinvestment in different parts of the borrower distribution are linked to the capitalization of the banking sector and the distribution of borrowers' risk characteristics and bank dependence. Our model yields a parsimonious asset pricing condition for firms' cost of capital that sheds light on heterogeneity in interest rate pass-through across borrower types, as well as its dependence on the health of the banking sector.

EFA2017-368-FIIT-1-Harris-Bank Capital, Risk-Taking, and the Composition of Credit.pdf

Dynamic Bank Capital Requirements

Tetiana Davydiuk

University of Pennsylvania

Discussant(s): Ester Faia (Goethe University Frankfurt)

The Basel III Accord requires countercyclical capital buffers to protect the banking system against potential losses associated with excessive credit growth and buildups of systemic risk. In this paper, I provide a rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 4% and 6% and depends on economic growth, bank supply of credit, and asset prices. Specifically, a one standard deviation increase in the bank credit-to-GDP ratio (GDP) translates into a 0.1% (0.7%) increase in capital requirements, while each standard deviation increase in the liquidity premium leads to a 0.1% decrease.

The welfare gain from implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.

EFA2017-703-FIIT-1-Davydiuk-Dynamic Bank Capital Requirements.pdf

Bank Capital Buffers in a Dynamic Model

Jochen Mankart1, Alexander Michaelides2, Spiros Pagratis3

1Deutsche Bundesbank; 2Imperial College Business School; 3Athens University of Economics and Business

Discussant(s): Bjorn Imbierowicz (Copenhagen Business School)

We estimate a dynamic structural banking model to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk-weighted capital requirements reduce loan supply and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Tighter leverage requirements, on the other hand, increase lending, preserve bank charter value and incentives to accumulate equity buffers, therefore leading to lower bank failure rates.

EFA2017-997-FIIT-1-Mankart-Bank Capital Buffers in a Dynamic Model.pdf


 
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