Abstract
The recent crisis has brought to the fore the cyclical properties of banking regulation. Countercyclical buffers and enhanced capital requirements meant to stabilize banks' balance sheets across the cycle are not costless, and a delicate balance needs to be reached between providing incentives to generate value and discouraging excessive risk-taking. The paper develops a model in which, in contrast with Modigliani-Miller, outside equity and capital requirements matter. It analyses banking regulation in the presence of macroeconomic shocks and studies the desirability of self-insurance mechanisms such as countercyclical capital buffers or dynamic provisioning, as well as "macro-hedges" such as CoCos and capital insurance.
Keywords
Banking regulation; macroeconomic shocks; countercyclical capital requirements;
JEL codes
- E32: Business Fluctuations • Cycles
- G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
- G28: Government Policy and Regulation
Reference
Mathias Dewatripont, and Jean Tirole, “Macroeconomic Shocks and Banking Regulation”, Journal of Money, Credit and Banking, vol. 44, “Supplement: S2”, December 2012, pp. 237–254.
See also
Published in
Journal of Money, Credit and Banking, vol. 44, “Supplement: S2”, December 2012, pp. 237–254