Reputation, Risk-Taking and Macroprudential Policy
40 Pages Posted: 8 Oct 2012
Date Written: October 7, 2012
This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. Unprofitable banks have strong incentives to invest in risky assets and generate inefficient credit booms when macroeconomic fundamentals are good in order to signal high ability. We show that across-the-system countercyclical capital requirements that deter credit booms are constrained optimal when fundamentals are within an intermediate range. We also show that when fundamentals are deteriorating, a public announcement of that fact can itself play a powerful role in preventing inefficient credit booms, providing an additional channel through which macroprudential policies can improve outcomes.
Keywords: macroprudential policy, credit booms, bank capital regulation
JEL Classification: G01, G38, E6
Suggested Citation: Suggested Citation