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Do Risk Premia Protect from Banking Crises?

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Author Info
Gersbach, Hans
Wenzelburger, Jan

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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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4935.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4935

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Related research
Keywords: banking crises; banking regulation; financial intermediation; macroeconomic risks; risk premia;

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Find related papers by JEL classification:
D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
G20 - Financial Economics - - Financial Institutions and Services - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gersbach, Hans & Wenzelburger, Jan, 2007. "Sophistication in Risk Management, Bank Equity, and Stability," CEPR Discussion Papers 6353, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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