Working Paper: CEPR ID: DP16221
Authors: Nuno Coimbra; Daisoon Kim; Hélène Rey
Abstract: Before the 2008 crisis, the cross-sectional skewness of banks' leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks' risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.
Keywords: bank regulation; financial cycle; leverage; monetary policy; risk-taking; systemic risk
JEL Codes: E44; E52; E58; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low interest rates (E43) | increase leverage by intermediaries (F65) |
| low interest rates (E43) | systemic risk (E44) |
| changes in the distribution of risk-taking behavior (D91) | systemic risk (E44) |
| macroprudential policies (E60) | financial stability (G28) |
| tightening of regulatory policies post-crisis (G18) | systemic risk (E44) |
| top five large intermediaries (G24) | total systemic risk (E44) |