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A risk assessment model for banks

Listed author(s):
  • Goodhart, Charles
  • Sunirand, Pojanart
  • Tsomocos, Dimitrios P.

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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File URL: http://eprints.lse.ac.uk/24750/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24750.

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Length: 28 pages
Date of creation: Jun 2004
Handle: RePEc:ehl:lserod:24750
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  1. Tsomocos, Dimitrios P., 2003. "Equilibrium analysis, banking, contagion and financial fragility," LSE Research Online Documents on Economics 24826, London School of Economics and Political Science, LSE Library.
  2. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios Tsomocos, 2005. "Procyclicality and the new Basel Accord - banks’ choice of loan rating system," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 537-557, October.
  3. Charles Goodhart & Pojanart Sunirand & Dimitrios Tsomocos, 2006. "A model to analyse financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 107-142, January.
  4. Martin Shubik, 2000. "The Theory of Money," Working Papers 00-03-021, Santa Fe Institute.
  5. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, vol. 55(2), pages 123-150, June.
  6. Tsomocos, Dimitrios P., 2003. "Equilibrium analysis, banking and financial instability," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 619-655, July.
  7. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
  8. Dimitrios P. Tsomocos & Lea Zicchino, 2005. "On Modelling Endogenous Default," OFRC Working Papers Series 2005fe15, Oxford Financial Research Centre.
  9. Goodhart, Charles A. E. & Sunirand, Pojanart & Tsomocos, Dimitrios P., 2004. "A model to analyse financial fragility: applications," Journal of Financial Stability, Elsevier, vol. 1(1), pages 1-30, September.
  10. Goodhart, Charles A. E. & Sunirand, Pojanart & Tsomocos, Dimitrios P., 2004. "A model to analyse financial fragility: applications," Journal of Financial Stability, Elsevier, vol. 1(1), pages 1-30, September.
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