Twin Default Crises

• Caterina Mendicino ^[3] ; Kalin Nikolov ^[3] ; Juan Rubio-Ramirez ^[1] ; Javier Suarez ^[4] ; Dominik Supera ^[2]
  1. [1] Emory University

     Emory University

     Estados Unidos

     
  2. [2] University of Pennsylvania

     University of Pennsylvania

     City of Philadelphia, Estados Unidos

     
  3. [3] European Central Bank
  4. [4] CEMFI and CEPR

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• Localización: Documentos de trabajo ( FEDEA ), ISSN 1696-7496, Nº. 1, 2020, págs. 1-58
• Idioma: inglés
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  • Texto completo (pdf)
• Resumen

  • Twin Default Crises are rare and severe episodes of borrower and bank defaults. We build a quantitative model that links borrower and bank solvency. This is crucial to reproduce key features of the data both in normal times and in Twin Default Crises. Specialization exposes banks to non-diversifiable borrowers’ default risk. Fluctuations in the non-diversifiable component of credit risk and bank leverage are important determinants of Twin Default Crises. Capturing the frequency and severity of Twin Default Crises is key for the correct calibration of bank capital requirements. Our framework implies higher capital requirements than alternative frameworks that do not model the link between borrower and bank default.