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Bank Capital Regulation in a Model of Modern Banking Crises

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  • Zhang, Xue
  • Poeschl, Johannes

Abstract

We study the macroeconomic effects of retail bank capital regulation in an economy with a retail and a shadow banking sector. The financial instability takes the form of bank runs on the shadow banking sector. Retail bank capital regulation reduces the frequency of bank runs by mitigating the drops in capital price during fire sales. The aggregate capital stock decreases as a result of capital misallocation. The cost of bank capital requirement outweighs its benefit of fewer bank runs.

Suggested Citation

  • Zhang, Xue & Poeschl, Johannes, 2017. "Bank Capital Regulation in a Model of Modern Banking Crises," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168275, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc17:168275
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    References listed on IDEAS

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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