Why Do We Need Countercyclical Capital Requirements?

Ilkka Kiema, Esa Jokivuolle, Timo Vesala

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Sammanfattning

We show that risk-based capital requirements can eliminate the market failure, caused by asymmetric information between entrepreneurs and banks, which distorts the efficient allocation of low-risk and high-risk investment projects among entrepreneurs. If project success probabilities decline in recessions, optimal capital requirements will have to be lower because the size of the market failure changes. This provides a new rationale for keeping risk-based capital requirements higher in good times and lowering them in bad times.
Originalspråkengelska
TidskriftJournal of Financial Services Research
Volym46
Utgåva1
Sidor (från-till)55-76
Antal sidor22
ISSN0920-8550
DOI
StatusPublicerad - 2014
MoE-publikationstypA1 Tidskriftsartikel-refererad

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