A Risk Assessment
Model for Banks
Charles A.E. Goodhart: Bank of
England, London School of Economics and
Financial Markets Group
Pojanart Sunirand: Bank of
England and London School of Economics
Dimitrios P. Tsomocos: Bank
of England, Said Business School and St. Edmund
Hall, University of Oxford, and Financial Markets
Group
Abstract
The objective of this paper is to
propose a model to assess risk for banks. Its main innovation is to
incorporate endogenous interaction between banks, recognising that the
actual risk to which an individual bank is exposed also depends on its
interaction with other banks and other private sector agents. To this end,
we develop a two-period general equilibrium model with three active
heterogeneous banks, incomplete markets, and endogenous default. The
setting of three heterogeneous banks allows us to study not only
interaction between any two individual banks, but also their interaction
with the rest of the banks in the banking system. We show that the model
is analytically tractable and can be calibrated against real UK banking
data and therefore can be implemented as a risk assessment tool for
financial regulators and central banks. We address the impact of monetary
and regulatory policy as well as credit and capital shocks in the real and
financial sectors.
JEL Classification: C68; E4; E5; G11;
G21
Keywords: Financial Fragility;
Financial Contagion; Systemic Risk; Banks; Monetary Policy; Regulatory
Policy; Equilibrium Analysis
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