A risk assessment model for banks Article Received: 28 July 2004 Revised: 10 September 2004 DOI:
Cite this article as: Goodhart, C., Sunirand, P. & Tsomocos, D. Annals of Finance (2005) 1: 197. doi:10.1007/s10436-004-0006-3 Summary.
This paper proposes a model to assess risk for banks. Its main innovation is to incorporate endogenous interaction among banks, where the actual risk an individual bank bears also depends on its interaction with other banks and investors. We develop a two-period general equilibrium model with three active heterogeneous banks, incomplete markets, and endogenous default. The model is calibrated against UK banking data and therefore can be implemented as a risk assessment tool for regulators and central banks. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors.
Keywords Financial fragility Financial contagion Systemic risk Banks Monetary policy Regulatory policy Equilibrium analysis Jel classification Numbers: C68 E4 E5 G11 G21
We are grateful to Lea Zicchino, an anonymous referee, seminar participants at the Bank of England, and the third Conference in Research in Economic Theory and Econometrics, Syros, for helpful comments. The views expressed are those of the authors and do not necessarily reflect those of the Bank of England.
This revised version was published online in January 2005 with corrections to the Cover date.
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