Madrid June 2012

A Macroeconomic Model of Endogenous Systemic Risk-taking

by Martínez-Miera and Suarez

Discussion byFrederic Malherbe

London Business School

• Main research questions٧ Optimal level of capital requirements

• Approach٧ New framework٧ Sophisticated / elegant٧ Deposit insurance => risk-shifting is attractive

• Results٧ Trade-off between credit rationing and systemic risk٧ Optimal capital requirements are 14%

Overview

Banks

The economy

Bankers Depositors

Firms

A much simpler version

Bankers

Depositors

The good firms

k

1 + r

e

1 + rL

The risk-shifting firms

k

1 + r

e

1 + rL

The trade offs

Good bank Risk-shifting bank

• For bankers٧ Static: inefficiency Vs subsidy٧ Dynamic: short-term gains Vs last banker standing

• For regulator٧ Inefficiency Vs credit rationing

Equilibrium dynamics

Risk-shifting bankGood bank

Risk-shifting bankGood bank

• Excellent paper!• Whish list

٧ Clarify pooling equilibrium٧ “Dynamic inefficiency” (Malherbe 2012)٧ Cyclically adjusted capital requirements

− Really capture micropru concerns (Repello – Suarez 2012)− Impact of general equilibrium effect may be sensitive to

parameterization

• Next steps ٧ Endogenize and

Main comments

Frédéric Malherbe (LBS)

Thank you very much!