The marketability of bank assets and managerial rents: implications for financial stability
AbstractOngoing financial innovation and greater information availability increase the tradability of bank assets and reduce banks' dependence on individual bank managers as private information in the lending process declines. In this paper we argue that this has two effects on banks, with opposing implications for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks' capital structure needs to be less concerned with disciplining the management. Deposits -the most effective disciplining device- can be reduced, increasing banks' resilience to adverse return shocks. However, limiting the hold-up problem also diminishes bank managers' rents, reducing their incentives to properly monitor and screen borrowers, with adverse implications for asset quality. Thus, even though the improved marketability of bank assets allows banks to adopt a safer capital structure, the default risk of banks does not necessarily decline. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2007,12.
Date of creation: 2007
Date of revision:
Marketability; Incentives; Financial Innovations; Financial Stability;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-20 (All new papers)
- NEP-BAN-2007-10-20 (Banking)
- NEP-BEC-2007-10-20 (Business Economics)
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- Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Discussion Paper 2013-066, Tilburg University, Center for Economic Research.
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