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SUMMARY:Opitmal Capital requirements over the Business and Financial Cycle
 s - Malherbe\, F (London Business School)
DTSTART:20141216T100000Z
DTEND:20141216T104500Z
UID:TALK56653@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:I propose a simple theory of intertwined business and financia
 l cycles\, where financial regulation both optimally responds to and influ
 ences the cycles. In this model\, financial frictions lead to excessive ag
 gregate lending by the financial sector. In response\, the regulator sets 
 capital requirements to trade off expected output against financial stabil
 ity. The capital requirement that ensures investment efficiency depends on
  the state of the economy and\, because of a general equilibrium effect\, 
 its stringency increases with aggregate banking capital. A regulation that
  fails to take this effect into account would exacerbate economic fluctuat
 ions and result in excessive aggregate lending during a boom. It would als
 o allow for an excessive build up of risk in the financial sector\, which 
 implies that\, at the peak of a boom\, even a small adverse shock could tr
 igger a banking sector collapse\, followed by an excessively severe credit
  crunch.\n
LOCATION:Seminar Room 1\, Newton Institute
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