Risky firms and fragile banks: Implications for macroprudential policy

Arbeitspapier

Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks' balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks.

Object Details

• ISBN: 978-3-95729-983-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 10/2024

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Monetary Policy ; Central Banks and Their Policies ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Financial Institutions and Services: Government Policy and Regulation
• Subject: bank default ; capital buffer ; firm risk ; macroprudential policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gasparini, Tommaso ; Lewis, Vivien ; Moyen, Stéphane ; Villa, Stefania
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2024

Further information

• Last update: 10.03.2025, 11:42 AM CET