Risk and Strategic Complementarities: Banks Behavior, Supervision and Macroprudential Policies

T. Carraro, Edoardo Gaffeo and Marco Gallegati

No 452, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: In this paper we present a model where frictions in the supervision process may set the stage for strategic complementarities among banks. We derive the conditions for strategic complementarities in the behavior of banks in a banking system in which the supervisory authority has a budget constraint on the resources to allocate for monitoring, and supervision is costly for banks. In such a framework, the goal of macroprudential policies consists in simultaneously restraining the incentive of banks in extending risky loans, without forcing the system towards a corner solution where all or none of the banks provide credit. We point out that the countercyclical bu er is a proper tool to reduce the number of banks issuing a higher amount of credit during booms, while a loan-support-program can increase the number of banks issuing higher credit during downturns.

Keywords: Banking Crisis; Strategic complementarity; Macroprudential Supervision (search for similar items in EconPapers)
JEL-codes: C49 E44 G32 (search for similar items in EconPapers)
Pages: 35
Date: 2021-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:anc:wpaper:452

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