Working Paper: NBER ID: w28907
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: Central Bank Policy; Risk Concentration; Systemic Risk; Macroprudential Policy
JEL Codes: E0; E5; F3; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| concentration of risk in the banking sector (F65) | behavior of monetary policymakers (E52) |
| monetary policy decisions (E52) | systemic risk (E44) |
| low interest rates (E43) | trade-offs between stimulating the economy and maintaining financial stability (E63) |
| macroprudential policies (E60) | financial stability (G28) |
| high leverage in large financial institutions (G21) | financial instability (F65) |
| changes in the distribution of risk-taking behavior (D91) | systemic risk (E44) |
| low costs of funds (G21) | increased leverage (G32) |
| loose regulatory frameworks (L59) | increased leverage (G32) |
| increased leverage (G32) | systemic risk (E44) |
| heterogeneity in risk-taking (D81) | effective macrofinance research and policy-making (E69) |