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A Static Capital Buffer is Hard To Beat

By Matthew Canzoneri, Behzad Diba, Luca Guerrieri, and Arsenii Mishin

Journal: Macroeconomics

In a model with endogenous risk-taking, deposit insurance and limited liability may lead banks to make risky loans that are socially inefficient. Capital requirements can prevent excessive risk-taking at the cost of reducing liquidity-producing bank dep...