Risky firms and fragile banks: implications for macroprudential policy

Tommaso Gasparini, Vivien Lewis, Stephane Moyen () and Stefania Villa
Additional contact information
Stephane Moyen: Deutsche Bundesbank

No 1518, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Based on US data, increases in firm default risk raise the probability of bank default while decreasing output and prices. To rationalize the empirical evidence, we analyze firm risk shocks using a New Keynesian model in which entrepreneurs and banks enter into a loan contract and both are subject to default risk. Corporate defaults lead to losses on banks' balance sheets. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We estimate the parameters of the model by matching the VAR impulse responses of firm and bank risk, output, prices and the policy rate to a range of shocks -- firm risk, demand, technology and monetary policy. Our model performs well at replicating the observed dynamics, making it suitable for policy analysis. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks.

Keywords: bank default; capital buffer; firm risk; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E61 G28 (search for similar items in EconPapers)
Date: 2026-02
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bancaditalia.it/pubblicazioni/temi-dis ... 518/en_tema_1518.pdf (application/pdf)

Related works:
Journal Article: Risky firms and fragile banks: implications for macroprudential policy (2026)
Working Paper: Risky Firms and Fragile Banks: Implications for Macroprudential Policy (2024)
Working Paper: Risky firms and fragile banks: implications for macroprudential policy (2024)
Working Paper: Risky firms and fragile banks: Implications for macroprudential policy (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1518_26

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().