Capital adequacy and the bank lending channel: Macroeconomic implications

► We develop a dynamic general-equilibrium model to examine macroeconomic implications of capital adequacy requirements (CAR). ► Strengthening CAR may not reduce the quantity of loans if banks can respond to this by accumulating more equity. ► We show that there is an inverted-U-shaped relationship between CAR and capital accumulation (and consumption). ► The optimal capital adequacy rate for social-welfare maximization is lower than that for capital-accumulation maximization.