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Bank Capital, Liquidity, and Systemic Risk

Jürgen Eichberger and Martin Summer
Journal of the European Economic Association
Vol. 3, No. 2/3, Papers and Proceedings of the Nineteenth Annual Congress of the European Economic Association (Apr. - May, 2005), pp. 547-555
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/40004997
Page Count: 9
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Bank Capital, Liquidity, and Systemic Risk
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Abstract

We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management, and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation on systemic risk. In particular we can analyze the impact of regulation on contagious defaults arising from mutual credit relations. We show that the impact of capital adequacy on systemic stability is ambiguous and that systemic risk might actually increase as a consequence of imposing capital constraints on banks.

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