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  2. Why do we need Countercyclical Capital Requirements?

Why do we need Countercyclical Capital Requirements?

Vertaisarvioidut julkaisut Ilkka Kiema, Esa Jokivuolle, Timo Vesala

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
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