Central Bank Policy and the Concentration of Risk: Empirical Estimates

48 Pages Posted: 14 Jul 2021

See all articles by Nuno Coimbra

Nuno Coimbra

Banque de France

Daisoon Kim

North Carolina State University; London Business School

Hélène Rey

London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: June 1, 2021

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.

JEL Classification: E44, E52, E58, G21, G28

Suggested Citation

Coimbra, Nuno and Kim, Daisoon and Rey, Helene, Central Bank Policy and the Concentration of Risk: Empirical Estimates (June 1, 2021). CEPR Discussion Paper No. DP16221, Available at SSRN: https://ssrn.com/abstract=3886663

Nuno Coimbra (Contact Author)

Banque de France

Paris
France

Daisoon Kim

North Carolina State University ( email )

Hillsborough Street
Raleigh, NC 27695
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Helene Rey

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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