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Banking Regulation in Hard Times: Business Cycles, Bank Capital, and the Bank Failure - Credit Crunch Dilemma

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  • Bernauer, Thomas
  • Koubi, Vally

Abstract

Restrictive policies aimed at reducing the likelihood of bank failures during recessions tend to increase the probability of a credit crunch. We examine whether this policy-dilemma is empirically observable, and whether policy-makers concentrate more on preventing bank failures or avoiding a credit crunch. We find that although capital-asset ratios in the total population of US banks in the 1990s are pro-cyclical, the most vulnerable banks (substantially undercapitalized ones) tend to increase their capital-asset ratios during recessions. These findings suggest that policy-makers are indeed experiencing a dilemma, and that they try to balance the relative probabilities of the two evils: they force the weakest banks to improve their capital-asset ratios while mitigating the risk of a credit crunch by accepting a reduction in the capital-asset ratios of less vulnerable banks.

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  • Bernauer, Thomas & Koubi, Vally, 2002. "Banking Regulation in Hard Times: Business Cycles, Bank Capital, and the Bank Failure - Credit Crunch Dilemma," Journal of Public Policy, Cambridge University Press, vol. 22(1), pages 61-75, January.
    • Handle: RePEc:cup:jnlpup:v:22:y:2002:i:01:p:61-75_00
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    Cited by:

    1. Mattoscio Nicola & Colantonio Emiliano & Odoardi Iacopo & Perrucci Antonella, 2013. "Restriction Of Credit After The Crisis Or A Different Allocation Of Resources? The Italian Case," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 481-490, July.
    2. Ghulame Rubbaniy & Ali Awais Khalid & Stathis Polyzos & Balqees Naser Almessabi, 2022. "Cyclicality of capital adequacy ratios in heterogeneous environment: A nonlinear panel smooth transition regression explanation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1960-1979, September.
    3. colantonio emiliano & mattoscio nicola & odoardi iacopo & perrucci antonella, 2014. "Credit And Economic Development: Structural Differences Among The Italian Regions," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 500-509, July.

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