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

G. Di Nicolo, A. Gamba, M. Lucchetta

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance ad equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Volume2011-025
Publication statusPublished - 2011

Publication series

NameEBC Discussion Paper
Volume2011-025

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Capital regulation
Liquidity
Banking
Taxation
Social values
Bank lending
Capital requirements
Tax
Bank efficiency
Liability
Financial distress
Social costs
Liquidity risk
Income
Intermediation
Optimal policy
Equity issuance
Costs
Credit risk

Keywords

  • Capital requirements
  • liquidity requirements
  • taxation of liabilities. JEL Classifications

Cite this

Di Nicolo, G., Gamba, A., & Lucchetta, M. (2011). Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking. (EBC Discussion Paper; Vol. 2011-025). Tilburg: EBC.
Di Nicolo, G. ; Gamba, A. ; Lucchetta, M. / Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking. Tilburg : EBC, 2011. (EBC Discussion Paper).
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abstract = "This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance ad equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.",
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Di Nicolo, G, Gamba, A & Lucchetta, M 2011 'Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking' EBC Discussion Paper, vol. 2011-025, EBC, Tilburg.

Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking. / Di Nicolo, G.; Gamba, A.; Lucchetta, M.

Tilburg : EBC, 2011. (EBC Discussion Paper; Vol. 2011-025).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking

AU - Di Nicolo, G.

AU - Gamba, A.

AU - Lucchetta, M.

N1 - This is also CentER Discussion Paper 2011-090

PY - 2011

Y1 - 2011

N2 - This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance ad equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.

AB - This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance ad equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.

KW - Capital requirements

KW - liquidity requirements

KW - taxation of liabilities. JEL Classifications

M3 - Discussion paper

VL - 2011-025

T3 - EBC Discussion Paper

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

PB - EBC

CY - Tilburg

ER -

Di Nicolo G, Gamba A, Lucchetta M. Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking. Tilburg: EBC. 2011. (EBC Discussion Paper).