Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses
By Anton Korinek. Social Science Research Network, 2011
219 citations recorded by the source corpus.
This paper develops a simple macroeconomic model of systemic risk in the form of financial accelerator effects: adverse developments in financial markets and in the real economy mutually reinforce each other and lead to a feedback cycle of falling asset prices, deteriorating balance sheets and tightening financing conditions. We show that decentralized agents choose to expose themselves to financial accelerator effects to a socially inefficient extent and do not take on sufficient insurance against systemic risk even if given access to a complete ex-ante insurance market. We use the framework to shed light on a number of current policy issues: First, we develop a new analytical framework of macro-prudential capital adequacy requirements that take into account systemic risk by employing an externality pricing kernel. Second, we show that agents employ ex-ante risk markets to fully undo any expected government bailout. Finally, we find that constrained market participants face socially insufficient incentives to raise more capital during systemic crises.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/d7b81cf6ebc3fd45c7d09f00248c2e1d9a74d64d
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Citations in the corpus
- Financial crises, bank risk exposure and government financial policy (2012, background): “Examples include Lorenzoni (2009), Korinek (2009 ), Bianchi (2009) and Stein.”
- Pecuniary Externalities in Economies with Financial Frictions (2016, unknown): “This paper combines the manuscripts “Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses” by Anton Korinek (2011) and “Dissecting Fire Sales Externalities” by Eduardo Dávila (2014).”
- Does Systemic Risk in the Financial Sector Predict Future Economic Downturns (2012, background): “Kashyap, Berner, and Goodhart (2011) and Korinek (2011) describe financial amplification effects resulting from fire sales of financial assets by individual banks that trigger the catastrophic declines in asset prices and reduced liquidity that accompany a systemic crisis.”
- Where the Risks Lie: A Survey on Systemic Risk (2017, unknown): “For instance, Korinek (2012) proposes to use a Pigovian tax in order to make banks”
- Managing credit booms and busts: A Pigouvian taxation approach (2019, unknown): “Korinek (2010, 2018) , Bianchi (2011) and Benigno et al. (2016) analyze models in which the collateral constraint involves the real exchange rate and characterize the optimal taxation of capital inflows for an emerging market economy.”
- Leverage and asset prices: An experiment (2012, unknown): “…" has as anchors an importance rating of 2 for " adjust the settings on a copy machine to make reduced size photocopies, " a rating of 4 for " adjust the speed of assembly line equipment based on the type of product being assembled, " and a rating of 6 to indicate a skill level equivalent…”