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Where to draw the line in prudential policy? Insights into banking stability and risk tolerance

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  • Jakubik, Petr
  • Moinescu, Bogdan Gabriel

Abstract

This study estimates the natural rate of bank defaults, the threshold below which systemic banking crises are unlikely, using a threshold model based on bank default rates and macroeconomic indicators. Analyzing global data from major crises over the past 40 years, we identify a critical default rate of 0.25 %, equivalent to one default per 400 banks annually. Aligned with a 'BBB' rating, this benchmark supports the calibration of supervisory risk tolerance frameworks. Moreover, the study provides a replicable, data-driven approach to prudential policy design, linking acceptable bank failure frequency to key macroeconomic variables, especially inflation indicators.

Suggested Citation

  • Jakubik, Petr & Moinescu, Bogdan Gabriel, 2025. "Where to draw the line in prudential policy? Insights into banking stability and risk tolerance," Finance Research Letters, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:finlet:v:82:y:2025:i:c:s1544612325008682
    DOI: 10.1016/j.frl.2025.107609
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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