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Twin Default Crises

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  • Caterina Mendicino
  • Kalin Nikolov
  • Juan Rubio-Ramirez
  • Javier Suarez

Abstract

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

Suggested Citation

  • Caterina Mendicino & Kalin Nikolov & Juan Rubio-Ramirez & Javier Suarez, 2020. "Twin Default Crises," Working Papers 2020-01, FEDEA.
    • Handle: RePEc:fda:fdaddt:2020-01
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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