{
  "title": "Bank Risk Within and Across Equilibria",
  "publication": "IMF Working Papers, July 2, 2014",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-risk-within-and-across-equilibria-41698",
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  "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.",
  "sections": [
    {
      "heading": "Summary findings",
      "content": "- The global financial crisis highlighted that the financial system can be most vulnerable when it seems most stable.\n- The paper models non-linear dynamics in banking where small shocks can lead from an equilibrium with few bank defaults straight to a full freeze.\n- The mechanism is based on amplification between adverse selection on banks' funding market and moral hazard in bank monitoring.\n- Results imply trade-offs between regulators' microprudential desire to shield individual weak banks and the macroprudential consequences of doing so.\n- Limiting bank reliance on wholesale funding always reduces systemic risk, but limiting the correlation between bank portfolios does not."
    },
    {
      "heading": "Mechanism and dynamics",
      "content": "- Non-linear dynamics: small shocks can produce large systemic shifts (from few defaults to full freeze).\n- Amplification channel: interaction between adverse selection in banks' funding market and moral hazard in bank monitoring drives the transition across equilibria."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Regulators face a trade-off between microprudential interventions (shielding individual weak banks) and potential adverse macroprudential consequences.\n- Policy that limits bank reliance on wholesale funding is recommended because it always reduces systemic risk.\n- Policies aimed solely at limiting correlation between bank portfolios are not effective at reducing systemic risk according to the model.\n\n---\n\n Content in this bundle\n\n- Bank Risk Within and Across Equilibria; by Itai Agur; IMF Working Paper No. 14/116; July 1, 2014\n  - Bank Risk Within and Across Equilibria; by Itai Agur; IMF Working Paper No. 14/116; July 1, 2014 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Bank Risk Within and Across Equilibria; by Itai Agur; IMF Working Paper No. 14/116; July 1, 2014 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-risk-within-and-across-equilibria-41698"
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    "Authors: Itai Agur",
    "Published: July 2, 2014",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498306515.001",
    "The global financial crisis highlighted that the financial system can be most vulnerable when it seems most stable.",
    "The paper models non-linear dynamics in banking where 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.",
    "Results imply trade-offs between regulators' microprudential desire to shield individual weak banks and the macroprudential consequences of doing so.",
    "Limiting bank reliance on wholesale funding always reduces systemic risk, but limiting the correlation between bank portfolios does not.",
    "Non-linear dynamics: small shocks can produce large systemic shifts (from few defaults to full freeze).",
    "Amplification channel: interaction between adverse selection in banks' funding market and moral hazard in bank monitoring drives the transition across equilibria.",
    "Regulators face a trade-off between microprudential interventions (shielding individual weak banks) and potential adverse macroprudential consequences.",
    "Policy that limits bank reliance on wholesale funding is recommended because it always reduces systemic risk.",
    "Policies aimed solely at limiting correlation between bank portfolios are not effective at reducing systemic risk according to the model.",
    "**Bank Risk Within and Across Equilibria; by Itai Agur; IMF Working Paper No. 14/116; July 1, 2014**"
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