Prudential rules that lower the capital adequacy ratio enables banks to reduce the interest rates charged on distressed borrowers in the face of shocks, an IMF paper published in June says.

Jaromir Benes and Michael Kumhof, the paper's authors, develop a New Keynesian model of risky corporate bank lending to measure how banks respond to shocks to lenders and the impact on the macroeconomic transmission mechanism. Benes and Kumhof note that when banks face regulatory costs of maintaining