Capital accumulation and regulation

Yilmaz E.

Quarterly Review of Economics and Finance,, vol.49, no.3, pp.760-771, 2009 (SSCI)

  • Publication Type: Article / Article
  • Volume: 49 Issue: 3
  • Publication Date: 2009
  • Journal Name: Quarterly Review of Economics and Finance,
  • Journal Indexes: Social Sciences Citation Index (SSCI)
  • Page Numbers: pp.760-771
  • Yıldız Technical University Affiliated: Yes


This paper sets up a dynamic model that analyzes a bank's capital decision and the impact of this decision on her default risk and lending that affects aggregate output in the economy under regulation. The model shows that even though capital regulation may reduce the default risk of the bank, it may lead to credit crunch, hence the ensuing decline in output in the real sector. Furthermore, it appears that the risk-based capital requirement changes the composition of both liability and asset of the bank's balance sheet.