Capital Flows and Bank Risk-Taking

Jorge Pozo

No 2019-017, Working Papers from Banco Central de Reserva del Perú

Abstract: I build up a framework to study the dynamics of the default probability of banks and the excess bank risk-taking in an emerging economy. I calibrate the model for the 1998 Peruvian economy. The novelty result is that an infinity-period model creates an intertemporal channel that amplifies banks' incentives to take excessive risk. I simulate the sudden stop that hit Peru in 1998 as a negative shock on the foreign borrowing limit of banks. The model accurately predicts the substantial short-term rise in the morosity rate through the rise of the excess bank risk-taking after the sudden stop.

Keywords: Sudden stop; bank risk-taking; prudential policy. (search for similar items in EconPapers)
JEL-codes: E44 F41 G01 G21 G28 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2019-017

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