Publications
Publications
- 2016
- HBS Working Paper Series
Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model
By: Juliane Begenau
Abstract
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.
Keywords
Capital Requirement; Bank Regulation; Demand For Safe Assets; Business Cycles; Bank Lending; Risk Management; Financial Liquidity; Financing and Loans; Capital; Banks and Banking
Citation
Begenau, Juliane. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model." Working Paper. (Revised September 2016.)