Capital Requirements and Financial Problems with the Macroeconomy

Abstract

The 2008 financial crisis has revitalized policymakers to find an appropriate policy to respond to the financial problem. The purpose of this paper is to investigate the impacts of capital requirement in response to shocks and to find out how capital requirement works in reducing the financial problem and stabilizes the balance sheets. We consider a macroeconomic model with a banking sector allowed to borrow funds from the international and domestic markets. The result shows that the capital requirement is efficient in responding to the financial problem. It increases the bank’s net worth and reduces a leverage ratio. The less aggressive the policy produces the lower loss and stabilized the variation of net worth and bank leverage. But a high degree of responsiveness is required if authorities aim to accelerate a net worth accumulation and overcomes the banking crisis. However, the capital requirement is less effective in responding to the technology shock. It cannot stabilize net worth and balance sheets