Excessive bank risk-taking in an infinite horizon economy

Jorge Pozo

Journal of Financial Stability, 2024, vol. 73, issue C

Abstract: We develop a dynamic framework to study banks’ incentives to take excessive risk in an emerging economy, where bank default probability and excess bank risk-taking are modeled endogenously. We calibrate it for the 1998 Peruvian economy. We find that the infinite-period feature amplifies banks’ incentives to take excessive risk. When we simulate the sudden stop that hit Peru in 1998, the model accurately predicts the substantial short-term rise in the non-performing loans ratio through the rise of the bank default probability.

Keywords: Bank risk-taking; Capital flows; Sudden stops; Stochastic steady state (search for similar items in EconPapers)
JEL-codes: E44 F41 G01 G21 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:73:y:2024:i:c:s1572308924000482

DOI: 10.1016/j.jfs.2024.101263

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