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A Risk Assessment Model for Banks

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  • Dimitrios P Tsomocos
  • Charles A.E. Goodhart

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.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2004-FE-11.

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Date of creation: 01 Jun 2004
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Handle: RePEc:oxf:wpaper:2004-fe-11

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Related research

Keywords: Financial Fragility; Financial Contagion; Systemic Risk; Banks; Monetary Policy; Regulatory Policy; Equilibrium Analysis;

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References

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  1. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P. Tsomocos, 2003. "Procyclicality and the new Basel Accord–banks’ choice of loan rating system," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24863, London School of Economics and Political Science, LSE Library.
  2. Dimitrios Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," FMG Discussion Papers, Financial Markets Group dp450, Financial Markets Group.
  3. Dimitrios Tsomocos & Lea Zicchino, 2005. "On Modelling Endogenous Default," FMG Discussion Papers, Financial Markets Group dp548, Financial Markets Group.
  4. Martin Shubik, 2000. "The Theory of Money," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1253, Cowles Foundation for Research in Economics, Yale University.
  5. Tsomocos, Dimitrios P., 2003. "Equilibrium analysis, banking and financial instability," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 619-655, July.
  6. Dimitrios P Tsomocos & Charles A.E. Goodhart, 2003. "A Model to Analyse Financial Fragility," Economics Series Working Papers 2003-FE-13, University of Oxford, Department of Economics.
  7. Dimitrios P Tsomocos & Charles A.E. Goodhart, 2004. "A Model to Analyse Financial Fragility: Applications," Economics Series Working Papers 2004-FE-05, University of Oxford, Department of Economics.
  8. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, INFORMS, vol. 52(9), pages 1301-1314, September.
  9. Charles Goodhart, 1989. "Money, Information and Uncertainty: 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262071223, December.
  10. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, Springer, vol. 55(2), pages 123-150, June.
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