Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations

Simona Cociuba (simona.cociuba@gmail.com), Malik Shukayev (shukayev@ualberta.ca) and Alexander Ueberfeldt

No 20166, University of Western Ontario, Departmental Research Report Series from University of Western Ontario, Department of Economics

Abstract: We develop a model in which a financial intermediary's investment in risky assets - risk taking is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations - either capital or leverage regulation, and a tax on profits - achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.

Keywords: Financial Intermediation; Risk Taking; Interest Rate Policy; Macroprudential Regulations; Capital Requirements; Leverage Ratio (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 G18 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: MANAGING RISK TAKING WITH INTEREST RATE POLICY AND MACROPRUDENTIAL REGULATIONS (2019)
Working Paper: Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations (2016)
Working Paper: Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations (2016)
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