Bank Capital Regulation in General Equilibrium / Gary Gorton, Andrew Winton.

By:

Gorton, Gary

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5244.Publication details: Cambridge, Mass. National Bureau of Economic Research 1995.Description: 1 online resource: illustrations (black and white)Subject(s):

G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages

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Abstract: We study whether the socially optimal level of stability of the banking system can be implemented with regulatory capital requirements in a multi-period general equilibrium model of banking. We show that: (i) bank capital is costly because of the unique liquidity services provided by demand deposits, so a bank regulator may optimally choose to have a risky banking system; (ii) even if the regulator prefers more capital in the system, the regulator is constrained by the private cost of bank capital, which determines whether bank shareholders will agree to meet capital requirements rather than exit the industry.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5244 (Browse shelf(Opens below))	Not For Loan

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August 1995.

We study whether the socially optimal level of stability of the banking system can be implemented with regulatory capital requirements in a multi-period general equilibrium model of banking. We show that: (i) bank capital is costly because of the unique liquidity services provided by demand deposits, so a bank regulator may optimally choose to have a risky banking system; (ii) even if the regulator prefers more capital in the system, the regulator is constrained by the private cost of bank capital, which determines whether bank shareholders will agree to meet capital requirements rather than exit the industry.