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Do Risk Premia Protect from Banking Crises

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  • Hans Gersbach
  • Jan Wenzelburger

Abstract

This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000356.

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Date of creation: 01 Sep 2004
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Handle: RePEc:cla:levrem:122247000000000356

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Cited by:
  1. Gersbach, Hans & Wenzelburger, Jan, 2007. "Sophistication in Risk Management, Bank Equity, and Stability," CEPR Discussion Papers 6353, C.E.P.R. Discussion Papers.

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