A macroeconomic model of banks’ systemic risk taking

Jorge Abad, David Martínez-Miera and Javier Suarez
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David Martínez-Miera: UC3M AND CEPR

No 2441, Working Papers from Banco de España

Abstract: We study banks’ systemic risk-taking decisions in a dynamic general equilibrium model, highlighting the macroprudential role of bank capital requirements. Banks decide on their unobservable exposure to systemic shocks by balancing risk-shifting gains against the value of preserving their capital after such shocks. Capital requirements reduce systemic risk taking, but at the cost of reducing credit and output in calm times, generating welfare trade-offs. We find that systemic risk taking is maximal after long periods of calm and may worsen if capital requirements are countercyclically adjusted. Removing deposit insurance introduces market discipline but increases the bank capital necessary to support credit, implies lower (though far from zero) optimal capital requirements and has nuanced social welfare effects.

Keywords: capital requirements; risk shifting; deposit insurance; systemic risk; financial crises; macroprudential policies (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-dge, nep-fdg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2441

DOI: 10.53479/37914

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