DP9134 A Macroeconomic Model of Endogenous Systemic Risk Taking

Author(s): David Martinez-Miera, Javier Suarez
Publication Date: September 2012
Keyword(s): Capital requirements, Credit cycles, Financial crises, Macroprudential policies, Risk shifting, Systemic risk
JEL(s): E44, G21, G28
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9134

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