Abstract:
In this paper Basel regulation is modeled in Dynamic Stochastic General Equilibrium (DSGE) framework. For this purpose, using data from 1981-2017 for Iran, capital adequacy as an importance regulation is modeled. Results show Basel regulation has procyclical effect. According to the results of the model and according to the realities of economy and banking system of Iran, in recession, lending and credit risk increase and repayment probability decrease. Despite these conditions, capital adequacy does not increase. This confirms that risks are less relevant in determining capital. If elasticity of repayment probability with respect to capital loan ratio is zero, Basel II is more procyclical than Basel I. If elasticity of repayment probability with respect to capital loan ratio is 0.5, Basel II is less procyclical than Basel I.
Machine summary:
According to the results of the model and according to the realities of economy and banking system of Iran, in recession, lending and credit risk increase and repayment probability decrease.
Tayler and Zilberman (2016) have been investigated the role of prudential regulation of capital adequacy and monetary policy on borrowing costs.
The shocks studied in this paper, in addition to the usual shockwave of dynamic equilibrium models, are related to the bank's capital, whose effects on banks’ balance sheets and corporate and household behavior have been investigated.
The specification of the model is that a dynamic banking model has been developed in which banks increase capital and deposits to protect their investment in risk-free government bonds and when they are in a financial crisis.
(2012), we relate the risk weight to the repayment probability estimated by the bank, because it reflects its perception of default risk: (View the image of this page) The bank sets deposit and lending rates, excess equity capital and government bonds, so as to maximize the present discounted value of its profits.
(2012), the business cycle effects of bank capital requirements are examined by the Central Bank in a New Keynesian model with credit market imperfections, a cost channel of monetary policy, and a perfectly elastic supply of liquidity at the policy rate.
A bank capital channel is introduced by assuming that higher levels of capital (relative to the amount of loans) induce banks to screen and monitor borrowers more carefully, thereby reducing the risk of default and increasing the repayment probability.