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A Macroeconomic Model of Endogenous Systemic Risk-taking

A Macroeconomic Model of Endogenous Systemic Risk-taking. by Martínez-Miera and Suarez Discussion by Frederic Malherbe London Business School. Madrid. June 2012. Main research questions Optimal level of capital requirements Approach New framework Sophisticated / elegant

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A Macroeconomic Model of Endogenous Systemic Risk-taking

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  1. A Macroeconomic Model of EndogenousSystemicRisk-taking by Martínez-Miera and Suarez Discussion by Frederic Malherbe London Business School Madrid June 2012

  2. Main research questions • Optimal level of capital requirements Approach • New framework • Sophisticated / elegant • Deposit insurance => risk-shifting is attractive Results • Trade-off between credit rationing and systemic risk • Optimal capital requirements are 14% Overview

  3. The economy Bankers Depositors Banks Firms

  4. A much simpler version Depositors Bankers

  5. The good firms 1 + rL 1 + r e k

  6. The risk-shifting firms 1 + rL 1 + r e k

  7. The trade offs For bankers • Static: inefficiency Vs subsidy • Dynamic: short-term gains Vs last banker standing For regulator • Inefficiency Vs credit rationing Risk-shifting bank Good bank

  8. Equilibrium dynamics Risk-shifting bank Good bank Risk-shifting bank Good bank

  9. Excellent paper! Whish list • Clarify pooling equilibrium • “Dynamic inefficiency” (Malherbe 2012) • Cyclically adjusted capital requirements • Really capture micropru concerns (Repello– Suarez 2012) • Impact of general equilibrium effect may be sensitive to parameterization Next steps • Endogenize and Main comments

  10. Thankyouverymuch! Frédéric Malherbe (LBS)

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