Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking
IMF Working Papers, March 1, 2012
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- Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking
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Bibliographic details
- Authors: Gianni De Nicolo, Andrea Gamba, Marcella Lucchetta
- Published: March 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475502244.001
Summary of main results
- The paper studies the impact of bank regulation and taxation in a dynamic model with banks exposed to credit and liquidity risk.
- There is an inverted U-shaped relationship between capital requirements and:
- bank lending,
- efficiency,
- welfare.
- Beyond a certain capital requirement threshold, the benefits of higher capital turn into costs.
- Liquidity requirements reduce lending, efficiency, and welfare significantly.
- The costs of high capital and liquidity requirements represent a lower bound on the benefits of these regulations in abating systemic risks.
- On taxation:
- corporate income taxes generate higher government revenues and entail lower efficiency and welfare costs than taxes on non-deposit liabilities.
Policy implications and interpretation
- Capital requirements have a non-monotonic effect; policy design should account for an optimal range rather than assuming monotonic benefits from higher requirements.
- Liquidity requirements impose substantial costs on lending, efficiency, and welfare, implying policymakers must weigh liquidity regulation benefits against these costs.
- When choosing tax instruments affecting banks, corporate income taxation may be preferable to taxation on non-deposit liabilities in terms of revenue and lower efficiency/welfare costs.
- The quantified costs of stringent capital and liquidity rules should be treated as a lower bound on their welfare trade-offs in mitigating systemic risk.
Model scope and focus
- Dynamic banking model incorporating:
- credit risk,
- liquidity risk,
- interactions between capital regulation, liquidity requirements, and taxation.
- Outcomes analyzed include lending, bank efficiency, welfare, and government revenues.
Key statistics and publication facts
- Authors: Gianni De Nicolo, Andrea Gamba, Marcella Lucchetta
- Date: March 1, 2012
- Pages: 53
- Volume: 2012
- Issue: 072
- Series: Working Paper No. 2012/072
- DOI: https://doi.org/10.5089/9781475502244.001
- Stock No: WPIEA2012072
- ISBN: 9781475502244
- ISSN: 1018-5941
IMF Working Paper: "Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking" (Gianni De Nicolo, Andrea Gamba, Marcella Lucchetta, March 1, 2012).