Working paper
Bank Capital Regulation and Endogenous Banking Crises (with Johannes Pöschl)
Abstract: We study the macroeconomic effects of retail bank capital regulation in an economy with two banking sectors: retail and shadow banking. Systemic shadow bank runs occur occasionally and cause severe recessions. A higher bank capital requirement reduces the frequency of banking crises by increasing the fire sale price of capital, if the capital requirement is relaxed timely during a bank run. A static capital requirement can instead increase the frequency of banking crises. Tightening the capital requirement leads to less financial intermediation and therefore a lower capital stock of the economy. We calibrate our model to match stylized facts of the U.S. economy and banking system, and post WWII banking crises in OECD countries. Our numerical results indicate that bank capital requirements are effective in reducing banking crises. By increasing the bank capital requirement from 8 to 15 percent, the frequency of bank runs decreases from 2.8 to 0.8 runs per 100 years. Meanwhile, the capital stock decreases by around 5 percent. According to our welfare analysis, retail bank capital requirement is undesirable, i.e. the welfare cost of lower financial intermediation outweighs the benefit of fewer bank runs.
Unemployment, Financial Crises and Macroprudential Regulation (with Johannes Pöschl)
We study the impact of the banking crisis on unemployment through the lens of a structural general equilibrium model with endogenous bank runs and downward wage rigidity. In the model, banks use deposits from patient households to intermediate durables (housing). The market price of durables is endogenous, which can lead to self-fulfilling runs on banks. A bank run can bring the economy to a state where the downward nominal wage constraint binds, which leads to involuntary unemployment. We calibrate the model to match the output, unemployment, bank leverage and bank borrowing spread dynamics of Spain during its recent financial crisis. We solve for the optimal macroprudential policy, which internalizes the bank run externality.