Reputation, Risk-Taking and Macroprudential Policy

40 Pages Posted: 8 Oct 2012

See all articles by David Aikman

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Benjamin Nelson

Bank of England

Misa Tanaka

Bank of England

Date Written: October 7, 2012

Abstract

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

Aikman, David and Nelson, Benjamin and Tanaka, Misa, Reputation, Risk-Taking and Macroprudential Policy (October 7, 2012). Bank of England Working Paper No. 462, Available at SSRN: https://ssrn.com/abstract=2158377 or http://dx.doi.org/10.2139/ssrn.2158377

David Aikman

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Benjamin Nelson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Misa Tanaka (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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