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Twin Default Crises

Caterina Mendicino (), Kalin Nikolov (), Juan Rubio-Ramirez and Javier Suarez ()

No 2020-01, Working Papers from FEDEA

Abstract: Twin Default Crises are rare and severe episodes of borrower and bank defaults. We build a quantitativemodel that links borrower and bank solvency. This is crucial to reproduce key features of thedata both in normal times and in Twin Default Crises. Specialization exposes banks to non-diversifiableborrowers’ default risk. Fluctuations in the non-diversifiable component of credit risk and bank leverageare important determinants of Twin Default Crises. Capturing the frequency and severity of Twin DefaultCrises is key for the correct calibration of bank capital requirements. Our framework implies highercapital requirements than alternative frameworks that do not model the link between borrower and bankdefault.

Date: 2020-01
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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