Affiliation: | (1) Bank of England, Threadneedle Street, London, EC2R 8AH, UK;(2) Bank of England, Threadneedle Street, London, EC2R 8AH, UK;(3) Bank of England, Threadneedle Street, London, EC2R 8AH, UK;(4) London School of Economics, and Financial Markets Group, Houghton Street, London, WC2A 2AE, UK;(5) London School of Economics, Houghton Street, London, WC2A 2AE, UK;(6) Said Business School and St. Edmund Hall, University of Oxford, Park End Street, Oxford, OX1 1HP, UK;(7) Financial Markets Group, Houghton Street, London, WC2A 2AE, UK |
Abstract: | Summary. This paper proposes a model to assess risk for banks. Its main innovation is to incorporate endogenous interaction among banks, where the actual risk an individual bank bears also depends on its interaction with other banks and investors. We develop a two-period general equilibrium model with three active heterogeneous banks, incomplete markets, and endogenous default. The model is calibrated against UK banking data and therefore can be implemented as a risk assessment tool for regulators and central banks. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors.We are grateful to Lea Zicchino, an anonymous referee, seminar participants at the Bank of England, and the third Conference in Research in Economic Theory and Econometrics, Syros, for helpful comments. The views expressed are those of the authors and do not necessarily reflect those of the Bank of England.This revised version was published online in January 2005 with corrections to the Cover date. |