Begenau, Juliane Maria2015-04-062015-04-06Begenau, Juliane. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model." Harvard Business School Working Paper, No. 15-072, March 2015.http://nrs.harvard.edu/urn-3:HUL.InstRepos:14369105This paper develops a quantitative dynamic general equilibrium model in which households' preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.en-US2015-04-06