Faculty of Economics and Business Administration Publications Database

Capital Regulation and Monetary Policy with Fragile Banks

Angeloni, Ignazio
Volume: 60
Number: 3
Pages: 311 - 324
Month: April
ISSN-Print: 0304-3932
Link External Source: Online Version
Year: 2013
Keywords: Macro Model with Banks; Bank Runs and Endogenous Bank Capital; Risk Taking Channel; Endogenous Risk Formation; Optimal Anti-cyclical Capital Ratios
Abstract: Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements amplify the cycle and are welfare detrimental. Within a class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.