Macroprudential Regulation: A Risk Management Approach

Daniel Dimitrov and Sweder van Wijnbergen

No 17846, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a credit portfolio approach to a Central Bank’s exposure to systemic risk, modeling it as risk arising from holding a portfolio containing (a subset of) the banks the CB supervises. We apply the model to a sample of European banks using CDS prices, which allows the inclusion of non-listed banks. We derive optimal macroprudential capital buffers based on individual banks’ contributions to systemic risk in two steps. First, we minimize aggregate systemic risk subject to an average capital buffer by varying individual buffers while maintaining the average. Then we set that average buffer optimally balancing the social costs and benefits of macroprudential buffers. We find substantial gaps between market-price-based optimal buffers and macroprudential buffers currently in use.

Keywords: Systemic risk; Regulation; Capital buffers; CDS rates; Financial institutions (search for similar items in EconPapers)
JEL-codes: G01 G18 G20 G38 (search for similar items in EconPapers)
Date: 2023-01
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Working Paper: Macroprudential Regulation: A Risk Management Approach (2023)
Working Paper: Macroprudential Regulation: A Risk Management Approach (2023)
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