Abstract
We show how banks’ excessive risk-taking, stemming from informational
asymmetries in loan markets, can lead to an excessive output loss when a
recession starts. Risk-based capital requirements can alleviate the output loss by
reducing excessive risk-taking in ‘normal’ times. Model simulations suggest that
the differentiation of risk-weights in the Basel framework might be further
increased in order to take full advantage of the allocational effects of capital
requirements. Our analysis also provides a new rationale for the countercyclical
elements of capital requirements.
asymmetries in loan markets, can lead to an excessive output loss when a
recession starts. Risk-based capital requirements can alleviate the output loss by
reducing excessive risk-taking in ‘normal’ times. Model simulations suggest that
the differentiation of risk-weights in the Basel framework might be further
increased in order to take full advantage of the allocational effects of capital
requirements. Our analysis also provides a new rationale for the countercyclical
elements of capital requirements.
| Original language | English |
|---|---|
| Place of Publication | Helsinki |
| Publisher | Bank of Finland |
| Number of pages | 38 |
| ISBN (Print) | 978-952-462-618-7 |
| ISBN (Electronic) | 978-952-462-619-4 |
| Publication status | Published - 2010 |
| MoE publication type | D4 Published development or research report or study |
Fields of Science
- 511 Economics
- pankkitoiminta
- luotot
- riskit
- tuotanto
- pääomavaatimus
- sääntely
- suhdanteet
- vakavaraisuus
- Basel III