Crisis-Proofing Heterogeneous Banks

Marcella Lucchetta ()
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Marcella Lucchetta: Ca' Foscari University of Venice

No 2025: 08, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: Recent financial crises have exposed the vulnerabilities of heterogeneous banking models, with investment banks facing greater risks than their retail counterparts due to volatile trading portfolios. This study introduces a three-period general equilibrium model that integrates bank heterogeneity with a novel crisis-induced adaptation mechanism, enabling banks to shift toward resilient retail models during economic distress. Unlike traditional frameworks that assume uniform bank behavior or rely on static analyses, this model captures the dynamic structural adjustments that mitigate systemic risk, offering a nuanced perspective on financial stability. Drawing on comprehensive U.S. and European banking data, the framework is validated across diverse shocks, including regional bank failures and global market disruptions. The findings inform regulatory strategies aligned with Basel III principles, addressing the unique challenges of mid-sized banks while tackling emerging risks from fintech innovations and climate exposures. By bridging micro-level bank dynamics with macro-level stability, the study provides a robust tool for regulators navigating the complexities of modern financial systems, with implications for both domestic and global banking landscapes.

Keywords: Bank Heterogeneity; Systemic Risk; Crisis Adaptation Policy; Marginal Expected Shortfall; Financial Stability; Fintech; Climate Risk (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 Q54 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025
New Economics Papers: this item is included in nep-fdg
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