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Central Bank Policy and the Concentration of Risk: Empirical Estimates*

Coimbra, N, Kim, D, Rey, H.

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 pro fit-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-o between stimulating the economy and nancial stability, and (2) macroprudential policies can be e ective tools to increase financial stability.

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*Hélène Rey thanks the ERC for financial support (ERC Advanced Grant 695722).

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