By Stuart Sayer
Issues in Finance: credits, Crises and Policies provides a suite of surveys on key matters surrounding the connection among credits, finance, and the macro-economy which are associated with the hot worldwide monetary crisis.
- Presents a well timed selection of surveys that make clear the hot monetary crisis
- Offers insights for economists in govt, enterprise, and finance
- Shows how the mainstream economics literature used to be no longer ignorant of the capability difficulties of the monetary framework and its interaction with the macro-economy
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Additional info for Issues in Finance: Credit, Crises and Policies
Overall, the theoretical literature on the bank capital channel predicts that the introduction of bank capital requirements, for either market or regulatory reasons, amplifies the effects of monetary and other exogenous shocks. This amplification effect usually rests on the argument that raising new capital may be difficult and costly for many banks, especially during economic downturns, 30 DRUMOND thereby increasing the financing cost faced by firms that borrow from those banks. If firms are restricted to banks as sources of credit, this would affect negatively firms’ investment and output.
For instance, as loans usually have a longer duration than deposits, banks may lose a large proportion of their deposits rather quickly while their loans remain outstanding. 5. The other being the risk of a systemic crisis, which will be analysed below. 6. To ensure that there is better public information, regulators can also require banks to follow certain standard accounting principles and to disclose a wide range of information that helps to assess the quality of a bank’s portfolio (Mishkin, 2006, p.
28). Another alternative to attenuate the Basel II procyclical effects, put forward by Pennacchi (2005), would be to combine a risk-based capital requirement with a risk-based deposit insurance such that undercapitalized banks would be required to partially adjust their capital ratio toward a target standard and pay a higher insurance premium appropriate to the capital ratio they choose. Finally, Cecchetti and Li (2008) suggest that under Basel II the optimal monetary policy should move interest rates more aggressively when the banking system is capital constrained, thus counteracting and even completely neutralizing the procyclicality of capital regulation.