Reputation, risk-taking and macroprudential policy

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 07 October 2012

Working Paper No. 462
By David Aikman, Benjamin Nelson and Misa Tanaka

This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. Unprofitable banks have strong incentives to invest in risky assets and generate inefficient credit booms when macroeconomic fundamentals are good in order to signal high ability. We show that across-the-system countercyclical capital requirements that deter credit booms are constrained optimal when fundamentals are within an intermediate range. We also show that when fundamentals are deteriorating, a public announcement of that fact can itself play a powerful role in preventing inefficient credit booms, providing an additional channel through which macroprudential policies can improve outcomes.

PDF Reputation, risk-taking and macroprudential policy 

Other papers

Was this page useful?
Add your details...