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Twin Defaults and Bank Capital Requirements

MENDICINO, CATERINA, NIKOLOV, KALIN, RUBIO‐RAMIREZ, JUAN, SUAREZ, JAVIER, SUPERA, DOMINIK·2026·The Journal of Finance
DOI 10.1111/jofi.70058
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Abstract

We examine optimal capital requirements in a quantitative general equilibrium model with banks exposed to nondiversifiable 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. This helps to reproduce the frequency and severity of twin defaults : simultaneously high firm and bank defaults. Hence, the optimal bank capital requirement, which trades off a lower frequency of twin defaults against restricting credit provision, is higher than under default risk models which underestimate the impact of borrower default on bank solvency.

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Metadata

Authors
MENDICINO, C., NIKOLOV, K., RUBIO‐RAMIREZ, J., SUAREZ, J., & SUPERA, D.
Venue
The Journal of Finance
Publisher
Wiley
Published
2026-06-25
Volume
81
Issue
5
Pages
2887-2932
ISSN
  • 0022-1082
  • 1540-6261
DOI
10.1111/jofi.70058
Cited by
0
Language
en
Licence

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CoChat. (2026). Citation check: Twin Defaults and Bank Capital Requirements. https://app.cochat.ai/papers/10.1111/jofi.70058
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MENDICINO, C., NIKOLOV, K., RUBIO‐RAMIREZ, J., SUAREZ, J., & SUPERA, D. (2026). Twin Defaults and Bank Capital Requirements. The Journal of Finance. https://doi.org/10.1111/jofi.70058

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