Malherbe, F;
(2020)
Optimal capital requirements over the business and financial cycles.
American Economic Journal: Macroeconomics
, 12
(3)
pp. 139-174.
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Abstract
I study economies where banks do not fully internalize the social costs of their lending decisions, which leads to real overinvestment. The bank capital requirement that restores investment efficiency varies over time. During booms, more investment is desirable, so the banking sector must be allowed to expand. This suggests a loosening of the requirement. However, there is also more bank capital. Since the banking sector exhibits decreasing returns to scale, this suggests a tightening instead. I find that the latter effect, which I dub the "bank capital channel," dominates: the optimal capital requirement is tighter during booms than in recessions.
| Type: | Article |
|---|---|
| Title: | Optimal capital requirements over the business and financial cycles |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | https://www.aeaweb.org/articles?id=10.1257/mac.201... |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10075924 |
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