Final Report Summary - RMAC (RISK MANAGEMENT AFTER THE CRISIS)
The project was aimed at developing new models of corporate risk management that could take into account some of the lessons learned from the global financial crisis of 2007-2009. It proceeded in three steps:
• Incorporating financial frictions into standard corporate risk management models;
• Adapting these new models to the specific activities of financial intermediaries;
• Putting these models into a general equilibrium perspective.
The first important result obtained was that the specific form of financial friction, whether it is due to exogenous imperfections such as costs of issuance of new securities (primary markets imperfections) or to contractual imperfections (endogenous agency costs within the firms) does not matter so much for the policy implications. As a result it seems legitimate to adopt the first approach, which is much more tractable.
The second important result is that general equilibrium and dynamic effects cannot be neglected. If one thinks for example at the impact of increasing the minimum capital ratio of banks, it may be very misleading, like is done in most of the academic and regulatory literature, to adopt a static partial equilibrium approach, and neglect the impact of such a regulation on the global supply of credit and on the capital accumulation strategy by financial intermediaries.
• Incorporating financial frictions into standard corporate risk management models;
• Adapting these new models to the specific activities of financial intermediaries;
• Putting these models into a general equilibrium perspective.
The first important result obtained was that the specific form of financial friction, whether it is due to exogenous imperfections such as costs of issuance of new securities (primary markets imperfections) or to contractual imperfections (endogenous agency costs within the firms) does not matter so much for the policy implications. As a result it seems legitimate to adopt the first approach, which is much more tractable.
The second important result is that general equilibrium and dynamic effects cannot be neglected. If one thinks for example at the impact of increasing the minimum capital ratio of banks, it may be very misleading, like is done in most of the academic and regulatory literature, to adopt a static partial equilibrium approach, and neglect the impact of such a regulation on the global supply of credit and on the capital accumulation strategy by financial intermediaries.