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Financial intermediation and endogenous risk in the banking sector

Author

Listed:
  • Broll, Udo
  • Eckwert, Bernhard
  • Eickhoff, Andreas

Abstract

The paper revisits the impact of uncertainty on the decision problem of a bank. The bank extends risky loans to private investors and sells deposits to savers at fixed rates. The uncertainty under which deposit/loan-portfolios are chosen by banks is endogenized through an information system that conveys public signals about the return distribution of bank loans. Transparency in the banking sector is defined in terms of the reliability of these signals. We find that higher transparency always raises expected bank profits, but may lead to a higher or lower expected loan volume. Moreover, higher transparency may reduce economic welfare.

Suggested Citation

  • Broll, Udo & Eckwert, Bernhard & Eickhoff, Andreas, 2012. "Financial intermediation and endogenous risk in the banking sector," Economic Modelling, Elsevier, vol. 29(5), pages 1618-1622.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1618-1622
    DOI: 10.1016/j.econmod.2012.05.015
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Udo Broll & Anna Sobiech & Jack E. Wahl, 2012. "Banking Firm, Equity and Value at Risk," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(4), December.
    2. Wong, Kit Pong, 2013. "Fixed versus variable rate loans under state-dependent preferences," Economic Modelling, Elsevier, vol. 31(C), pages 659-663.
    3. Wong, Kit Pong, 2014. "Fixed versus variable rate loans under regret aversion," Economic Modelling, Elsevier, vol. 42(C), pages 140-145.
    4. Wong, Kit Pong, 2014. "Regret theory and the competitive firm," Economic Modelling, Elsevier, vol. 36(C), pages 172-175.
    5. Bieta, Volker & Broll, Udo & Siebe, Wilfried, 2014. "Collateral in banking policy: On the possibility of signaling," Mathematical Social Sciences, Elsevier, vol. 71(C), pages 137-141.

    More about this item

    Keywords

    Financial intermediation; Market transparency; Banking firm;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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