Cociuba, Simona E. Shukayev, Malik Ueberfeldt, Alexander
Year of Publication:
Research Report 2016-6
We develop a model in which a financial intermediary's investment in risky assets - risk taking - is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations - either capital or leverage regulation, and a tax on profits - achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.
Financial intermediation risk taking interest rate policy macroprudential regulations capital requirements leverage ratio