1. Madrid June 2012 A Macroeconomic Model of Endogenous Systemic Risk-taking by Martínez-Miera and Suarez Discussion by Frederic Malherbe London Business School

2. Main research questions ٧ Optimal level of capital requirements Approach ٧ New framework ٧ Sophisticated / elegant ٧ Deposit insurance => risk-shifting is attractive Results ٧ Trade-off between credit rationing and systemic risk ٧ Optimal capital requirements are 14% Overview

3. Banks The economy BankersDepositors Firms

4. A much simpler version Bankers Depositors

5. The good firms k 1 + r e 1 + r L

6. The risk-shifting firms k 1 + r e 1 + r L

7. The trade offs Good bank Risk-shifting bank For bankers ٧ Static: inefficiency Vs subsidy ٧ Dynamic: short-term gains Vs last banker standing For regulator ٧ Inefficiency Vs credit rationing

8. Equilibrium dynamics Risk-shifting bank Good bank Risk-shifting bank Good bank

9. Excellent paper! Whish list ٧ Clarify pooling equilibrium ٧ “Dynamic inefficiency” (Malherbe 2012) ٧ Cyclically adjusted capital requirements −Really capture micropru concerns (Repello – Suarez 2012) −Impact of general equilibrium effect may be sensitive to parameterization Next steps ٧ Endogenize and Main comments

10. Frédéric Malherbe (LBS) Thank you very much!