Risk-Shifting, Concentration Risk and Heterogeneous Borrowers

31 Pages Posted: 19 Aug 2019 Last revised: 14 Oct 2019

See all articles by Jens Fittje

Jens Fittje

University of Hagen (Fernuniversitaet in Hagen)

Date Written: August 16, 2019

Abstract

This article analyzes the effect of valuations-based capital requirements and concentration risk provisions on the risk-shifting response of the banking sector to monetary easing. It provides a closed economy DSGE model for the Euro zone with costly bank capital and two heterogeneous borrowers. Banks maximize their profits by choosing the optimal allocation of their loan portfolio. A procyclical movement of capital requirements is observed, which amplifies the expansionary effect of monetary easing. Capital requirements decline asymmetrically, which creates a risk-shifting impulse. Sticky bank capital rents can strengthen this risk-shift.

Keywords: risk-shifting, capital requirements, bank capital, bank lending, heterogeneity, financial stability

JEL Classification: E12, E43, E44, E52, E42, E59, G01, G21

Suggested Citation

Fittje, Jens, Risk-Shifting, Concentration Risk and Heterogeneous Borrowers (August 16, 2019). Available at SSRN: https://ssrn.com/abstract=3438257 or http://dx.doi.org/10.2139/ssrn.3438257

Jens Fittje (Contact Author)

University of Hagen (Fernuniversitaet in Hagen) ( email )

Universitätsstrasse 41
Feithstrathe 140
Hagen, 58084
Germany

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