Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses

43 Pages Posted: 2 Jun 2011

See all articles by Anton Korinek

Anton Korinek

University of Virginia; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2011


This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves to such risk to a socially inefficient extent because of pecuniary externalities that are triggered during financial amplification. The paper develops an externality pricing kernel that quantifies the state-contingent magnitude of such externalities and provides welfare-theoretic foundations for macro-prudential policy measures to correct the distortion. Furthermore, it derives conditions under which agents employ ex-ante risk markets to fully undo any expected government bailout. Finally, it finds that constrained market participants face socially insufficient incentives to raise more capital during episodes of financial amplification.

Keywords: financial amplification, systemic risk, systemic externalities, externality pricing kernel, macroprudential regulation, bailout neutrality

JEL Classification: E44, G13, G18, D62, H23

Suggested Citation

Korinek, Anton, Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses (May 20, 2011). ECB Working Paper No. 1345, Available at SSRN: or

Anton Korinek (Contact Author)

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