Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking

By Gianni De Nicolo, Andrea Gamba, Marcella Lucchetta

March 1, 2012

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Gianni De Nicolo, Andrea Gamba, and Marcella Lucchetta. Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the impact of bank regulation and taxation in a dynamic model with banks exposed to credit and liquidity risk. We find an inverted U-shaped relationship between capital requirements and bank lending, efficiency, and welfare, with their benefits turning into costs beyond a certain requirement threshold. By contrast, liquidity requirements reduce lending, efficiency and welfare significantly. The costs of high capital and liquidity requirements represent a lower bound on the benefits of these regulations in abating systemic risks. On taxation, corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities.

Subject: Bank regulation, Banking, Capital adequacy requirements, Financial institutions, Financial regulation and supervision, Liquidity requirements, Loans, Stocks

Keywords: Bank default, Bank efficiency, Bank Regulation, Bank regulation reform, Bank shareholder, Capital adequacy requirements, Capital requirement, Cash flow, Coverage ratio, Dynamic Banking Model, Earnings before taxes, Enterprise value, Equity capital, Fire sale, Liquidity requirements, Loans, Maturity transformation, Restructured bank, Stocks, Taxation, Unregulated bank, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/072
Stock No:

WPIEA2012072
ISBN:

9781475502244
ISSN:

1018-5941

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