Managing The Risk Of Loans With Basis Risk Sell, Hedge Or Do Nothing

This file is part of IDEAS, which uses RePEc data

Managing The Risk Of Loans With Basis Risk Sell, Hedge Or Do Nothing

Author Info

Larry D. Wall
Milind M. Shrikhande

Additional information is available for the following registered author(s):

Larry D. Wall

Abstract

Individual loans contain a bundle of risks including credit risk, and interest rate risk. This paper focuses on the general issue of bank's management of these various risks in a model with costly loan monitoring and convex taxes. The results suggest that if the hedge is not subject to basis risk then hedging dominates a strategy of do nothing. Whether hedging dominates loan sales depends on whether it induces reduced monitoring, the net benefit of monitoring and the reduced tax burden of eliminating all risk via selling. If the hedge is subject to basis risk then a do nothing strategy may dominate the hedging and loan sales strategy for risk neutral banks. A number of empirical implications follow from the analytical and numerical results in the paper. JEL classification: G21

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

Publisher Info
Paper provided by Tor Vergata University, CEIS in its series Departmental Working Papers with number 143.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Mar 2001
Date of revision:
Handle: RePEc:rtv:ceiswp:143

Contact details of provider:
Postal: Via Columbia, 2 00133 Roma
Phone: 0039 06 2040234
Fax: 0039 06 2020687
Email:
Web page: http://www.ceistorvergata.it
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords:

Other versions of this item:

Paper
- Larry D. Wall & Milind M. Shrikhande, 2000. "Managing the risk of loans with basis risk: sell, hedge, or do nothing?," Working Paper 2000-25, Federal Reserve Bank of Atlanta. [Downloadable!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-07-31 (All new papers)
NEP-FIN-2002-07-31 (Finance)

References listed on IDEAS
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.:

Pennacchi, George G, 1988. " Loan Sales and the Cost of Bank Capital," Journal of Finance, American Finance Association, vol. 43(2), pages 375-96, June. [Downloadable!] (restricted)
Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March. [Downloadable!] (restricted)
Smith, Clifford W. & Stulz, Ren? M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December. [Downloadable!]
James T. Moser, 1998. "Credit derivatives: just-in-time provisioning for loan losses," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-11. [Downloadable!]
Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January. [Downloadable!] (restricted)
Rebecca S. Demsetz, 1999. "Bank loan sales: a new look at the motivations for secondary market activity," Staff Reports 69, Federal Reserve Bank of New York. [Downloadable!]
Robert S. Neal, 1996. "Credit derivatives: new financial instruments for controlling credit risk," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 15-27. [Downloadable!]
Tom Copeland & Maggie Copeland, 1999. "Managing Corporate FX Risk: A Value-Maximizing Approach," Financial Management, Financial Management Association, vol. 28(3), Fall.
Credit Derivatives: Is It Always Good to Have More Risk Management Tools? Gregory Duffee 96-42 Banks & Chungsheng Zhou, 1996. "Banks and Credit Derivatives: Is It Always Good to Have More Risk Management Tools?," Center for Financial Institutions Working Papers 96-42, Wharton School Center for Financial Institutions, University of Pennsylvania.
Allen N. Berger & Gregory F. Udell, 1991. "Securitization, risk, and the liquidity problem in banking," Finance and Economics Discussion Series 181, Board of Governors of the Federal Reserve System (U.S.).

Full references

Statistics
Access and download statistics

Did you know? Authors registered on the RePEc Author Service receive monthly emails with details about downloads and abstract views of their works.

This page was last updated on 2009-11-29.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.