Dynamics of banks' capital accumulation

Emanuel Barnea, Moshe Kim

Research output: Contribution to journalArticlepeer-review


We construct a dynamic neoclassical model of banking capital where the dynamics are governed by the process of financial capital accumulation and credit risk realizations in a structure where stylized banking characteristics are maintained. This is aimed at focusing on how the profit-maximizing capital ratio of banks evolves and how it reacts to exogenous shocks particularly so during periods of prolonged downturn of the economy. We examine impulse responses of our model to credit risk shock, business cycle shock, and monetary policy shock. The convergence of financial capital to its optimal level is also explored.

Original languageEnglish
Pages (from-to)779-816
Number of pages38
JournalJournal of Money, Credit and Banking
Issue number4
StatePublished - Jun 2014


  • Adverse selection
  • Financial capital accumulation
  • Market discipline
  • Monitoring
  • Moral hazard

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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