{
  "title": "Risky Bank Lending and Optimal Capital Adequacy Regulation",
  "publication": "IMF Working Papers, June 1, 2011",
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  "summary": "We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending. Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth.",
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    {
      "heading": "Summary",
      "content": "- We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending.\n- Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth.\n- The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses.\n- Banks' main response to loan losses is to raise lending rates to rebuild net worth.\n- Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare.\n- The gains from eliminating limited liability and moral hazard would be an order of magnitude larger."
    },
    {
      "heading": "Key findings and mechanisms",
      "content": "- Financial accelerator sector: Banks channel household deposits to a sector exhibiting financial accelerator effects; loan performance in this sector drives bank net worth dynamics.\n- Unconditional lending rate: Loan contracts specify an unconditional lending rate, creating exposure to loan losses for banks when realized returns are adverse.\n- Bank response to losses: Principal bank response is to increase lending rates, which affects credit supply and welfare.\n- Prudential rule effects:\n  - Adjusting minimum capital adequacy requirements in response to loan losses significantly increases welfare.\n  - Eliminating limited liability and moral hazard produces welfare gains an order of magnitude larger than those from the prudential rules studied."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Implement prudential rules that adapt minimum capital adequacy requirements to loan loss realizations to materially improve welfare.\n- Consider deeper reforms addressing limited liability and moral hazard, as these yield substantially larger potential welfare improvements than adaptive capital adequacy rules alone.\n\n---\n\n Content in this bundle\n\n- wp11130\n  - wp11130 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp11130 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/risky-bank-lending-and-optimal-capital-adequacy-regulation-24900"
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    "Authors: Jaromir Benes, Michael Kumhof",
    "Published: June 1, 2011",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455259359.001",
    "We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending.",
    "Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth.",
    "The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses.",
    "Banks' main response to loan losses is to raise lending rates to rebuild net worth.",
    "Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare.",
    "The gains from eliminating limited liability and moral hazard would be an order of magnitude larger.",
    "Financial accelerator sector: Banks channel household deposits to a sector exhibiting financial accelerator effects; loan performance in this sector drives bank net worth dynamics.",
    "Unconditional lending rate: Loan contracts specify an unconditional lending rate, creating exposure to loan losses for banks when realized returns are adverse.",
    "Bank response to losses: Principal bank response is to increase lending rates, which affects credit supply and welfare.",
    "Prudential rule effects:",
    "Implement prudential rules that adapt minimum capital adequacy requirements to loan loss realizations to materially improve welfare.",
    "Consider deeper reforms addressing limited liability and moral hazard, as these yield substantially larger potential welfare improvements than adaptive capital adequacy rules alone.",
    "**_wp11130**"
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