Where to draw the line in prudential policy? Insights into banking stability and risk tolerance

Petr Jakubik and Bogdan Gabriel Moinescu

Finance Research Letters, 2025, vol. 82, issue C

Abstract: This study estimates the natural rate of bank defaults, the threshold below which systemic banking crises are unlikely, using a threshold model based on bank default rates and macroeconomic indicators. Analyzing global data from major crises over the past 40 years, we identify a critical default rate of 0.25 %, equivalent to one default per 400 banks annually. Aligned with a 'BBB' rating, this benchmark supports the calibration of supervisory risk tolerance frameworks. Moreover, the study provides a replicable, data-driven approach to prudential policy design, linking acceptable bank failure frequency to key macroeconomic variables, especially inflation indicators.

Keywords: Bank default rate; Banking crisis; Too many to fail; Risk tolerance; Prudential policy (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G33 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:82:y:2025:i:c:s1544612325008682

DOI: 10.1016/j.frl.2025.107609

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