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Financial intermediation and endogenous risk in the banking sector

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  • Broll, Udo
  • Eckwert, Bernhard
  • Eickhoff, Andreas
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    Abstract

    The paper revisits the impact of uncertainty on the decision problem of a bank. The bank extends risky loans to private investors and sells deposits to savers at fixed rates. The uncertainty under which deposit/loan-portfolios are chosen by banks is endogenized through an information system that conveys public signals about the return distribution of bank loans. Transparency in the banking sector is defined in terms of the reliability of these signals. We find that higher transparency always raises expected bank profits, but may lead to a higher or lower expected loan volume. Moreover, higher transparency may reduce economic welfare.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999312001344
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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 5 ()
    Pages: 1618-1622

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1618-1622

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Financial intermediation; Market transparency; Banking firm;

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    References

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    1. Christina E. Bannier, 2010. "Is there a Holdup Benefit in Heterogeneous Multiple Bank Financing?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(4), pages 641-661, December.
    2. Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2152-2167, July.
    3. J.J.J. Thijssen & K.J.M. Huisman & P.M. Kort, 2003. "The Effects of Information on Strategic Investment and Welfare," Trinity Economics Papers 200310, Trinity College Dublin, Department of Economics.
    4. Flood, Robert P. & Marion, Nancy P., 2004. "A model of the joint distribution of banking and currency crises," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 841-865, October.
    5. Hirshleifer, Jack, 1975. "Speculation and Equilibrium: Information, Risk, and Markets," The Quarterly Journal of Economics, MIT Press, vol. 89(4), pages 519-42, November.
    6. Sulganik,E. & Zilcha,I., 1996. "The value of Information: the Case of Signal-Dependent Opportunity Sets," Papers 1-96, Tel Aviv.
    7. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, 06.
    8. Eckwert, B. & Zilcha, I., 1999. "Incomplete Risk Sharing Arrangements and the Value of Information," Papers 13-99, Tel Aviv.
    9. Citanna, Alessandro & Villanacci, Antonio, 2000. "Incomplete Markets, Allocative Efficiency, and the Information Revealed by Prices," Journal of Economic Theory, Elsevier, vol. 90(2), pages 222-253, February.
    10. Wong, Kit Pong, 2011. "Regret theory and the banking firm: The optimal bank interest margin," Economic Modelling, Elsevier, vol. 28(6), pages 2483-2487.
    11. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    12. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
    13. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-58, March.
    14. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
    15. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
    16. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
    17. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February.
    18. Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August.
    19. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
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    Cited by:
    1. Wong, Kit Pong, 2014. "Regret theory and the competitive firm," Economic Modelling, Elsevier, vol. 36(C), pages 172-175.
    2. Udo Broll & Anna Sobiech & Jack E. Wahl, 2012. "Banking Firm, Equity and Value at Risk," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(4), December.
    3. Wong, Kit Pong, 2013. "Fixed versus variable rate loans under state-dependent preferences," Economic Modelling, Elsevier, vol. 31(C), pages 659-663.

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