Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287761 
Year of Publication: 
2024
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 10/2024
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks' balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks.
Subjects: 
bank default
capital buffer
firm risk
macroprudential policy
JEL: 
E44
E52
E58
E61
G28
ISBN: 
978-3-95729-983-3
Document Type: 
Working Paper

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