Risk weightings should reflect borrowing constraints, paper argues

The Bank of Finland

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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