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The Qatar Centre for Global Banking & Finance welcomes Dr Caterina Mendicino from the European Central Bank to present this research seminar on 'Twin Defaults and Bank Capital Requirements'.
We examine optimal capital requirements in a quantitative general equilibrium model with banks exposed to non-diversifiable borrower default risk. Contrary to standard models of bank default risk, our framework captures the limited upside but significant downside risk of loan portfolio returns (Nagel and Purnanandam, 2020). This helps to reproduce the frequency and severity of twin defaults: simultaneously high firm and bank failures. Hence, the optimal bank capital requirement, which trades off a lower frequency of twin defaults against restricting credit provision, is 5pp higher than under standard default risk models which underestimate the impact of borrower default on bank solvency.
About the Speaker
Caterina Mendicino is the Senior Lead Economist in the Monetary Policy Research Division of the European Central Bank (ECB). She is interested in quantitative and empirical research in monetary and financial economics, with a particular focus on the real and financial stability effects of central bank policies and the interaction between monetary and macroprudential policies.
Caterina holds a Ph.D from the Stockholm School of Economics and prior to joining the ECB worked for the Bank of Portugal (2008-2013) and the Bank of Canada (2006-2008).
Additional information can be found on her webpage.