Twin Default Crises

Caterina Mendicino (), Kalin Nikolov, Juan Rubio-Ramirez (), Javier Suarez and Dominik Supera ()
Additional contact information
Caterina Mendicino: European Central Bank, http://www.ecb.int/
Juan Rubio-Ramirez: Emory University, http://www.emory.edu/
Dominik Supera: Wharton School, https://www.wharton.upenn.edu/

Working Papers from CEMFI

Abstract: We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises - simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency.

Keywords: Bank default; firm default; financial crises; bank capital requirements. (search for similar items in EconPapers)
JEL-codes: E44 G01 G28 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.cemfi.es/ftp/wp/2006.pdf (application/pdf)

Related works:
Working Paper: Twin Default Crises (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2020_2006

Access Statistics for this paper

More papers in Working Papers from CEMFI Contact information at EDIRC.
Bibliographic data for series maintained by Araceli Requerey ().