Why do we need Countercyclical Capital Requirements?
Abstract
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.
Julkaisun tiedot
Jokivuolle, E., Kiema, I., & Vesala, T. (2014), Why Do We Need Countercyclical Capital Requirements? Journal of Financial Services Research, 46, 55–76.
Linkki julkaisuun
- ISSN: 0920-8550, e-ISSN: 1573-0735
- Ilkka Kiema
- tutkimusohjaaja
- Puh. +358-40 940 2287
- ilkka.kiema@labore.fi
- Tutkijaprofiili
