Bank Risk Within and Across Equilibria

 
Author/Editor: Itai Agur
 
Publication Date: July 02, 2014
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: The global financial crisis highlighted that the financial system can be most vulnerable when it seems most stable. This paper models non-linear dynamics in banking. Small shocks can lead from an equilibrium with few bank defaults straight to a full freeze. The mechanism is based on amplification between adverse selection on banks' funding market and moral hazard in bank monitoring. Our results imply trade-offs between regulators' microprudential desire to shield individual weak banks and the macroprudential consequences of doing so. Moreover, limiting bank reliance on wholesale funding always reduces systemic risk, but limiting the correlation between bank portfolios does not.
 
Series: Working Paper No. 14/116
Subject(s): International financial system | Banking sector | Credit risk | Risk premium | Econometric models

 
English
Publication Date: July 02, 2014
ISBN/ISSN: 9781498306515/1018-5941 Format: Paper
Stock No: WPIEA2014116 Pages: 37
Price:
US$18.00 (Academic Rate:
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