Credit allocation, capital requirements and output

Esa Jokivuolle, Ilkka Kiema, Timo Vesala

Research output: Working paperDiscussion paperProfessional

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.
Original languageEnglish
Place of PublicationHelsinki
PublisherBank of Finland
Number of pages38
ISBN (Print)978-952-462-618-7
ISBN (Electronic)978-952-462-619-4
Publication statusPublished - 2010
MoE publication typeD4 Published development or research report or study

Fields of Science

  • 511 Economics
  • pankkitoiminta
  • luotot
  • riskit
  • tuotanto
  • pääomavaatimus
  • sääntely
  • suhdanteet
  • vakavaraisuus
  • Basel III

Cite this

Jokivuolle, E., Kiema, I., & Vesala, T. (2010). Credit allocation, capital requirements and output. (Bank of Finland Research Discussion Papers; No. 17/2010). Helsinki: Bank of Finland.