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Zero-risk weights and capital misallocation
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| Authors and Corporations: | , , |
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| Other Authors: | Hürtgen, Patrick [Author] • Walker, Todd B. [Author] |
| Type of Resource: | E-Book |
| Language: | English |
| published: | |
| Series: |
Deutsche Bundesbank: Discussion paper ; no 2024, 16
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| Subjects: | |
| Source: | Verbunddaten SWB Lizenzfreie Online-Ressourcen |
| ISBN: | 9783957299918 |
| Summary: | Financial institutions, especially in Europe, hold a disproportionate amount of domestic sovereign debt. We examine the extent to which this home bias leads to capital misallocation in a real business cycle model with imperfect information and fiscal stress. We assume banks can hold sovereign debt according to a zero-risk weight policy and contrast this scenario to one in which banks weight the sovereign debt according to default probabilities. Banks are assumed to miscalculate the probability of a disaster state due to moral hazard and imperfect monitoring. This distortion pushes the economy away from the first-best allocation. We show that the zero risk weight policy exacerbates these distortions while a non-zero risk-weight improves allocations. The welfare costs associated with zero-risk weight policies are large. Households are willing to give up 3.2 percent of their consumption to move to the first-best allocation, whereas in the economy with non-zero risk-weights households are willing to give up only 1.2 percent of their consumption to move to the first-best allocation. |
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| Physical Description: | 1 Online-Ressource (circa 45 Seiten); Illustrationen |
| ISBN: | 9783957299918 |