Managing risk taking with interest rate policy and macroprudential regulations

by Simona E. Cociuba, Malik Shukayev and Alexander Ueberfeldt

We develop a model in which a financial intermediary's investment in risky assets - risk taking - is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations - either capital or leverage regulation, and a tax on profits - achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.

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Year of publication:	November 2016
Authors:	Cociuba, Simona E. ; Shukayev, Malik ; Ueberfeldt, Alexander
Publisher:	London, Ontario, Canada : Department of Economics, Social Science Centre, Western University
Subject:	Financial intermediation \| risk taking \| interest rate policy \| macroprudential regulations \| capital requirements \| leverage ratio \| Finanzmarktaufsicht \| Financial supervision \| Finanzintermediation \| Zinspolitik \| Interest rate policy \| Theorie \| Theory \| Bankrisiko \| Bank risk \| Bankenregulierung \| Bank regulation \| Basler Akkord \| Basel Accord \| Kapitalstruktur \| Capital structure \| Finanzmarktregulierung \| Financial market regulation \| Kapitalbedarf \| Capital requirements \| Kreditrisiko \| Credit risk \| Systemrisiko \| Systemic risk \| Bankenaufsicht \| Banking supervision \| Risikomanagement \| Risk management