Research Discussion Papers, Bank of Finland
Credit allocation, capital requirements and output
(), Ilkka Kiema
() and Timo Vesala
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.
Keywords: bank regulation; Basel III; capital requirements; credit risk; crises; procyclicality; (follow links to similar papers)
JEL-Codes: D41; D82; G14; G21; G28; (follow links to similar papers)
35 pages, December 1, 2010
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- This paper is forthcoming as:
Jokivuolle, Esa, Ilkka Kiema and Timo Vesala, 'Credit allocation, capital requirements and output', Journal of Financial Services Research.
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