This paper is an expanded version of a presentation made by Mathias Dewatripont at the JMCB-NB-UniBern 2011 conference at the Study Center Gerzensee. The authors are grateful to Hans Gersbach, the editor and an anonymous referee for helpful comments. The research leading to these results has received funding from the European Research Council under the European Community's Seventh Framework Programme (FP7/2007–2013) Grant Agreement No. 249429.
Macroeconomic Shocks and Banking Regulation
Article first published online: 18 DEC 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue Supplement s2, pages 237–254, December 2012
How to Cite
DEWATRIPONT, M. and TIROLE, J. (2012), Macroeconomic Shocks and Banking Regulation. Journal of Money, Credit and Banking, 44: 237–254. doi: 10.1111/j.1538-4616.2012.00559.x
- Issue published online: 18 DEC 2012
- Article first published online: 18 DEC 2012
- Received May 2, 2012; and accepted in revised form August 14, 2012.
- banking regulation;
- macroeconomic shocks;
- countercyclical capital requirements
The recent crisis has brought to the fore the cyclical properties of banking regulation. Countercyclical buffers and enhanced capital requirements meant to stabilize banks’ balance sheets across the cycle are not costless, and a delicate balance needs to be reached between providing incentives to generate value and discouraging excessive risk taking. The paper develops a model in which, in contrast with Modigliani–Miller, outside equity and capital requirements matter. It analyses banking regulation in the presence of macroeconomic shocks and studies the desirability of self-insurance mechanisms such as countercyclical capital buffers or dynamic provisioning, as well as “macro-hedges” such as CoCos and capital insurance.