Capital Regulation in a Macroeconomic Model with Three Layers of Default

We develop a dynamic general equilibrium model for the positive and normativeanalysis of macroprudential policies. Optimizing financial intermediaries allocate theirscarce net worth together with funds raised from saving households across two lendingactivities, mortgage and corporate lending. For all borrowers (households, firms, andbanks) external financing takes the form of debt which is subject to default risk. This“3D model” shows the interplay between three interconnected net worth channels thatcause financial amplification and the distortions due to deposit insurance. We apply itto the analysis of capital regulation.