Working Paper: CEPR ID: DP9134
Authors: David Martinez-Miera; Javier Suarez
Abstract: We analyze banks' systemic risk taking in a simple dynamic general equilibrium model. Banks collect funds from savers and make loans to firms. Banks are owned by risk-neutral bankers who provide the equity needed to comply with capital requirements. Bankers decide their (unobservable) exposure to systemic shocks by trading off risk-shifting gains with the value of preserving their capital after a systemic shock. Capital requirements reduce credit and output in
Keywords: capital requirements; credit cycles; financial crises; macroprudential policies; risk shifting; systemic risk
JEL Codes: E44; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower systemic risk-taking (G40) | Reduced incentives for risk-shifting behavior (G40) |
| Higher capital requirements (G28) | Lower systemic risk-taking (G40) |
| Higher capital requirements (G28) | Reduced incentives for risk-shifting behavior (G40) |
| Higher capital requirements (G28) | Lower expected values for GDP (E20) |
| Higher capital requirements (G28) | Lower bank credit availability (G21) |