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Risk and Strategic Complementarities: Banks Behavior, Supervision and Macroprudential Policies

Author

Listed:
  • T. Carraro
  • Edoardo Gaffeo

    (Department of Economics and Management, Universita' degli Studi di Trento (Italy).)

  • Marco Gallegati

    (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche)

Abstract

In this paper we present a model where frictions in the supervision process may set the stage for strategic complementarities among banks. We derive the conditions for strategic complementarities in the behavior of banks in a banking system in which the supervisory authority has a budget constraint on the resources to allocate for monitoring, and supervision is costly for banks. In such a framework, the goal of macroprudential policies consists in simultaneously restraining the incentive of banks in extending risky loans, without forcing the system towards a corner solution where all or none of the banks provide credit. We point out that the countercyclical bu er is a proper tool to reduce the number of banks issuing a higher amount of credit during booms, while a loan-support-program can increase the number of banks issuing higher credit during downturns.

Suggested Citation

  • T. Carraro & Edoardo Gaffeo & Marco Gallegati, 2021. "Risk and Strategic Complementarities: Banks Behavior, Supervision and Macroprudential Policies," Working Papers 452, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    • Handle: RePEc:anc:wpaper:452
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    References listed on IDEAS

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    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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