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Central Bank Policy and the Concentration of Risk: Empirical Estimates

Journal

Journal of Monetary Economics

Subject

Economics

Publishing details

Journal of Monetary Economics 2022 Vol 125 p 182-198

Authors / Editors

Coimbra N;Kim D;Rey H

Biographies

Helene Rey

Publication Year

2022

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

Bank regulation; Financial cycle; Leverage; Monetary policy; Risk-taking; Systemic risk

Available on ECCH

No


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