Macroprudential Regulation: A Risk Management Approach

70 Pages Posted: 6 Mar 2024

See all articles by Daniel Dimitrov

Daniel Dimitrov

University of Amsterdam; Tinbergen Institute; De Nederlandsche Bank - Financial Markets Division

Sweder van Wijnbergen

Centre for Economic Policy Research (CEPR)

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Abstract

We develop a credit portfolio approach to measuring a Central Bank's exposure to systemic risk (multiple simultaneous defaults). We apply the model to a sample of European banks using CDS prices, which allows us to also cover non-listed banks. We then derive optimal macroprudential capital buffers based on individual banks' contributions to systemic risk in two steps. First, we minimize aggregate systemic risk subject to an average capital buffer by allocating it across banks. Then we also endogenously set that average buffer by optimizing a welfare function balancing the social costs and benefits of macroprudential buffers. We find substantial gaps between market-price-based optimal buffers and macroprudential buffers as currently applied in our sample of European banks.

Keywords: Systemic risk, capital buffers, financial institutions, Regulation, CDS rates

Suggested Citation

Dimitrov, Daniel and Wijnbergen, Sweder van, Macroprudential Regulation: A Risk Management Approach. Available at SSRN: https://ssrn.com/abstract=4749661 or http://dx.doi.org/10.2139/ssrn.4749661

Daniel Dimitrov (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

De Nederlandsche Bank - Financial Markets Division ( email )

P.O.B. 98
1000 AB Amsterdam
Netherlands

Sweder van Wijnbergen

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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