Endogenizing banking regulation and supervision : a dynamic equilibrium approach

This thesis presents a modi ed dynamic general equilibrium model by introducing a supervisory and regulatory agent (RS) that is responsible for setting the level of bank regulation and supervision quality ( ) in order to ensure the banking sector's long term pro tability. We solve the model to examine the e ects of on the optimizing agents, which are households, rms and banks. The level of bank regulation and supervision quality a ects households, through the fraction of savings that are deposited in the banking system; rms, through the fraction of performing loans that they get from the banks; and banks, through the degree of law enforcement on the banks. Our model yields a unique equilibrium with the expected outcomes; that is to say, bank regulation and supervision quality a ects the steady state levels of capital and output positively; and a ects the steady state rates of deposit and loan interest negatively. We also examine the comparative statics of the steady state level of capital, the steady state rates of deposit and loan interest with respect to the rest of the model parameters.