ICEF/LFE Reserach Seminar in Finance
Venue: Shabolovka st. 26, Room 3211
On Thursday, March 20 at 4.40 pm International College of Economics and Finance and International Labouratory of Financial Economics held a research seminar in Finance.
Speaker: Frederic Malherbe (LBS)
Theme: «Optimal capital requirements over the business and financial cycles»
Venue: Shabolovka st., 26, room 3211
Abstract: I propose a simple theory of intertwined business and financial cycles, where financial regulation both optimally responds to and influences the business and financial cycles. In this model, government guarantees induce excessive aggregate lending by the financial sector. In response, the regulator sets capital requirements to trade-off expected output against financial stability (lower probability and social cost of a banking sector collapse). This trade-off depends on the state of the economy. Optimal capital requirements are therefore not constant. Because of a general equilibrium effect, optimal capital requirements increase with aggregate banking capital. A regulation that fails to take this effect into account would exacerbate economic fluctuations and result in excessive aggregate lending during a boom. It would also allow for an excessive build up of risk in the financial sector, which implies that, at the peak of a boom, even a small negative productivity shock can trigger a banking sector collapse, then followed by an excessively severe credit crunch.
Everyone interested is welcome to attend!
Pass can be ordered by:
contact: Zheleznov Slava