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Gianni De Nicolò is with the IMF Research Department and CESifo; Andrea Gamba is with the Warwick Business School, Finance Group; Marcella Lucchetta is with the University Ca’ Foscari of Venice, Department of Economics. We thank without implications for comments and suggestions: our discussants Hayne Leland, Falco Fecht, Gyongyi Loranth and Wolf Wagner; Charles Calomiris, Stijn Claessens, Ruud de Mooij, Peter DeMarzo, Javier Suarez, Goetz van Peter and Philippe Wingender; the participants of the Financial Stability Conference at Tilburg University (2011), the Conference on Stability and Risk Control in Banking, Insurance and Financial Markets (2011) at the University of Venice, the ZEW/Bundesbank conference on Basel III and Beyond at the Bundesbank Center in Eltville, the 12th Symposium on Finance, Banking, and Insurance at Karlsruhe Institute of Technology (2011), and seminar participants at Aarhus University, the International Monetary Fund, and Warwick Business School.
The new Basel III framework is detailed in Basel III: A global regulatory framework for more resilient banks and banking systems, Bank for International Settlements, Basel, June 2011. On taxation proposals, see Acharya, Pedersen, Philippon, and Richardson (2010) and Financial Sector Taxation, International Monetary Fund, Washington D.C., September 2010.
For a review of the pre-crisis literature on pro–cyclicality and some empirical evidence, see Zhu (2008) and Panetta and Angelini (2009)).
The (weighted) average maturity of existing loans at date t, assuming the bank does not default nor it makes any adjustments on the current investment in loans, is
as the residual loans outstanding at date t + s, s ≥ 0, is Lt+s = Lt(1 – δ)s.
As per Assumption 9 introduced below, the support for deposits and credit shock processes is compact, implying that the collateral constraint is well defined.
As detailed in Appendix C, in the simulations the support of each state variable is within three times the unconditional standard deviation of each marginal distribution around the long term average.
Given the collateral constraint, in the model default of the non—regulated bank may occur only when Bt > 0.
There is a literature examining the impact of bank closure rules that may augment standard regulation. In Appendix B we examine one such rule, and show that it may complement capital regulation under some assumptions about bank reorganization costs.
See Financial Sector Taxation, International Monetary Fund, Washington D.C., September 2010.
Current proposals include systemic risk levies designed to mimic such Pigouvian levies. See, for example, Acharya and Richardson (2009), Perotti and Suarez (2011), and for a critical evaluation see Shackelford, Shaviro, and Slemrod (2010).
See the relevant tables in Financial Sector Taxation, International Monetary Fund, Washington D.C., September 2010. Note that our metrics, as well as the collateral constraint and the liquidity constraints, are reformulated to incorporate these taxes
Deposits and short term bonds are the cheapest form financing. If the same dollar were raised by issuing equity, the cost would be higher due to both the higher cost of equity capital and to floatation costs. In this case the upper bound would be even lower.
and the left-hand-side of the second inequality is higher than the corresponding side of the first inequality. Therefore, all stakeholders can be paid by liquidating the assets.