Bank monitoring: comparing regulatory capital requirements to central bank collateral requirements
In this paper, Böser and Gersbach develop a model in which central bank reserves have to be acquired to settle interbank liabilities. Through this framework they show that capital constraints, following from regulatory capital requirements, and liquidity constraints, following from collateral requirements in central bank lending facilities, have different effects on the monitoring incentives of bankers. Specifically, they show that:
- With regard to bank monitoring, monetary policy via collateral requirements leads to a unique collateral leverage channel, which cannot be replicated by standard capital requirements. Through this channel, banks can expand loan supply and deposit issuance when they face liquidity constraints, by raising the collateral value of their loans with tighter monitoring of firms.
- Liquidity-constrained bankers have more incentives to monitor than capital-constrained bankers under any circumstance. As a result, the collateral leverage channel can improve welfare beyond standard bank capital regulation.
- While such capital requirements lead to a regulatory leverage channel that can replicate the collateral leverage channel, such action may contradict other objectives, as discouraging the banks’ risk-taking.
- With current monetary policies leading to large reserve holdings of banks, a particular effect of central bank collateral frameworks is lost.
Leverage Constraints and Bank Monitoring: Bank Regulation versus Monetary Policy
Authors: Florian Böser, Hans Gersbach
From: ETH Zurich
