Sophistication in Risk Management, Bank Equity, and Stability
AbstractWe investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks by low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6353.
Date of creation: Jun 2007
Date of revision:
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Other versions of this item:
- Jan Wenzelburger & Hans Gersbach, 2007. "Sophistication in Risk Management, Bank Equity, and Stability," Keele Economics Research Papers KERP 2007/08, Centre for Economic Research, Keele University.
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-30 (All new papers)
- NEP-BAN-2007-06-30 (Banking)
- NEP-MAC-2007-06-30 (Macroeconomics)
- NEP-REG-2007-06-30 (Regulation)
- NEP-RMG-2007-06-30 (Risk Management)
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