Costs and Benefits of Capital Adequacy Regulation in a Banking System1
نویسندگان
چکیده
We analyze the effects of capital adequacy regulation on bank insolvency and aggregate investment. We show that while the risk of bank insolvency may be reduced there are economic costs arising from repercussions of regulation on aggregate economic activity. Solvency regulation restricts loan supply and has adverse effects on investment. Using a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of their lending activities and an insolveny mechanism we can study the economics and the logic of this trade off in detail. 1 We would like to thank Eva Terberger for helpful discussions in the early stages of this paper.
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