Setting banks’ capital requirements purely from the point of view of risk management “can be too narrow from the viewpoint of optimal credit allocation”, a working paper published by the Bank of Finland argues.

In Should bank capital requirements be less risk-sensitive because of credit constraints?, Gene Ambrocio and Esa Jokivuolle present a simple model of the banking sector to consider what they call the “potential trade-off” between financial stability and economic growth.

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