No. 1518 - Risky firms and fragile banks: implications for macroprudential policy
The paper analyzes the role of the banking sector in transmitting increases in firm risk to the real economy, using both monthly data for the United States from 2005 to 2020 and a theoretical model. The analysis then assesses the effectiveness of two macroprudential policy instruments in stabilizing the economy: a minimum capital requirement and a countercyclical capital buffer (CCyB), which can be released in the event of recessionary shocks.
An exogenous increase in firm risk leads to a reduction in investment demand, which in turn results in a decline in output and inflation; it also increases banks' default risk due to potential losses on loans to firms. The joint application of high minimum capital requirements and a CCyB ensures both financial stability and support for the real economy.
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06 February 2026
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