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Javier Suarez
- 27 January 2021
- RESEARCH BULLETIN - No. 80Details
- Abstract
- Episodes such as the current coronavirus (COVID-19) crisis might lead to a significant rise in borrower defaults and, consequently, weakness in the banking sector. Having well-capitalised banks makes the financial system more resilient to such episodes. We assess how much capital would be optimal for banks to hold, taking into consideration the risk of banking crises driven by borrower defaults (which we term “twin default crises”).
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation - Network
- Research Task Force (RTF)
- 25 May 2020
- WORKING PAPER SERIES - No. 2414Details
- Abstract
- We examine optimal capital requirements in a quantitative general equilibrium model with banks exposed to non-diversifiable borrower default risk. Contrary to standard models of bank default risk, our framework captures the limited upside but significant downside risk of loan portfolio returns (Nagel and Purnanandam, 2020). This helps to reproduce the frequency and severity of twin defaults: simultaneously high firm and bank failures. Hence, the optimal bank capital requirement, which trades off a lower frequency of twin defaults against restricting credit provision, is 5pp higher than under standard default risk models which underestimate the impact of borrower default on bank solvency.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
- 24 May 2019
- WORKING PAPER SERIES - No. 2286Details
- Abstract
- How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements.
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages - Network
- Research Task Force (RTF)
- 9 July 2015
- WORKING PAPER SERIES - No. 1827Details
- Abstract
- We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages