Discussion of Nonlinear Bank Capital Regulation by Maximilian Jager and Karl Schulz

Type
presentation
Date Issued
2025-04-04
Author(s)
Abstract
Prudential authorities mandate that banks hold equity capital exceeding a share of their risk-weighted assets. How should policymakers design this central tool of financial regulation? We propose a new, unifying framework for nonlinear bank capital regulation. Adopting a perturbation approach, we characterize the positive and normative effects of reforming risk weights through sufficient statistics, including credit-supply elasticities and welfare externalities from financial intermediation. We estimate these statistics and apply the framework to evaluate the Federal Reserve's recent proposal to flatten the risk-weight schedule. Our analysis reveals nonlinear effects on credit allocation, resulting in a moderate reduction in total credit supply but a substantial rise in bank equity, enhancing bank stability. Finally, we derive novel sufficient statistics formulas for the optimal risk-weight schedule, balancing efficiency gains with risk externalities of credit supply while accommodating market failures and regulatory constraints. Numerical simulations suggest that the Fed's proposed weights are close to optimal, generating significant welfare gains for households at the expense of bankers and entrepreneurs.
Language
English
Keywords
G21
G28
H22
H23
E51 bank regulation
capital requirements
incidence
second-best policy
Pigouvian taxation
elasticities
financial externalities
HSG Classification
contribution to scientific community
Event Title
SGF Conference 2025
Event Location
SIX, Zurich
Event Date
$ April 2025
URL
File(s)
Thumbnail Image
Name

25 04 SGF Zurich paper Nonlinear_Bank_Capital_Regulation_v2.pdf

Size

1.65 MB

Format

Adobe PDF

Checksum (MD5)

d558c7e529f69bc53fed5742de21d0a1

Thumbnail Image
Name

2025 04 SGF Discussion_Nonlinear_Bank_Capital_Regulation.pdf

Size

213.98 KB

Format

Adobe PDF

Checksum (MD5)

1ba2e63a7c82f090e55c622b1ae9ca4c