Klimenko, Nataliya; Pfeil, Sebastian; Rochet, Jean-Charles - 2016 - This version: June, 2016
We develop a novel dynamic model of banking showing that aggregate bank capital is an important determinant of bank … decisions for the future loss-absorbing capacity of the banking sector. In particular, we find that unregulated banks lend too … much. Imposing a minimum capital ratio helps tame excessive lending, which enhances stability of the banking system …