Abstract
This article analyzes the effect of valuations-based capital requirements and concentration risk provisions on the risk-shifting response of the banking sector to monetary easing. It provides a closed economy DSGE model for the Euro zone with costly bank capital and two heterogeneous borrowers. Banks maximize their profits by choosing the optimal allocation of their loan portfolio. A procyclical movement of capital requirements is observed, which amplifies the expansionary effect of monetary easing. Capital requirements decline asymmetrically, which creates a risk-shifting impulse. Sticky bank capital rents can strengthen this risk-shift.
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