For the increase of the bank capital adequacy ratio, banks can meet this
requirement either by issuing new equity or by reducing loan. With a simple
model with banks, we try to show two things. (i) If a bank`s decision is made
for the benefit of the incumbent shareholders, it may reduce risky loan for the
new capital regulation even though it can re-capitalize by selling new equity to
the public. (ii) If all the banks do so, there happens net deposit withdrawal,
which may cause a further shrinkage of credit supply. A simple heuristic
calibration with Korean data shows that these results may hold in a reasonable
parameter value range.
