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Credit risk transfer and bank competition

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  • Hakenes, Hendrik
  • Schnabel, Isabel

Abstract

We present a banking model with imperfect competition in which borrowers' access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans that are then transferred to other parties, leading to an increase in aggregate risk. Higher competition increases welfare in the presence of CRT with public information. In contrast, welfare eventually decreases for high levels of competition in the presence CRT with private information due to the expansion of unprofitable loans. This finding coincides with the decrease in credit quality observed during the late years of the credit boom preceding the subprime crisis.

Suggested Citation

  • Hakenes, Hendrik & Schnabel, Isabel, 2010. "Credit risk transfer and bank competition," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 308-332, July.
  • Handle: RePEc:eee:jfinin:v:19:y:2010:i:3:p:308-332
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    Cited by:

    1. Aldasoro, Iñaki & Barth, Andreas, 2017. "Syndicated loans and CDS positioning," ESRB Working Paper Series 58, European Systemic Risk Board.
    2. Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 195-210.
    3. repec:eee:jfinin:v:23:y:2014:i:2:p:214-231 is not listed on IDEAS
    4. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    5. repec:eee:corfin:v:49:y:2018:i:c:p:344-378 is not listed on IDEAS
    6. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
    7. Silva Buston, C.F., 2013. "Active Risk Management and Banking Stability," Discussion Paper 2013-068, Tilburg University, Center for Economic Research.
    8. Silva Buston, Consuelo, 2016. "Active risk management and banking stability," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 203-215.
    9. Chen, Zhizhen & Liu, Frank Hong & Opong, Kwaku & Zhou, Mingming, 2017. "Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 48-74.
    10. Kevin x.d. Huang & Zhe Li & Jianfei Sun, 2018. "Bank Competition, Directed Search, and Loan Sales," Vanderbilt University Department of Economics Working Papers 18-00001, Vanderbilt University Department of Economics.
    11. Constantin ANGHELACHE & Alexandru MANOLE & Mădălina Gabriela ANGHEL & Diana Valentina SOARE, 2016. "Statistical-econometric model used to analyze the operational and insolvency risks," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 221-228, Autumn.
    12. Fiordelisi, Franco & Mare, Davide Salvatore, 2014. "Competition and financial stability in European cooperative banks," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 1-16.
    13. van Oordt, Maarten R.C., 2014. "Securitization and the dark side of diversification," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 214-231.
    14. Constantin ANGHELACHE & Alexandru MANOLE & Mădălina Gabriela ANGHEL & Diana Valentina SOARE, 2016. "Statistical-econometric model used to analyze the operational and insolvency risks," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 221-228, Autumn.
    15. Farruggio, Christian & Uhde, André, 2015. "Determinants of loan securitization in European banking," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 12-27.
    16. repec:rsr:supplm:v:65:y:2017:i:11:p:33-42 is not listed on IDEAS
    17. Correia, Ricardo & Dubiel-Teleszynski, Tomasz Piotr & Población García, Francisco Javier, 2017. "A structural model to study the bail-out process in a bank and its macro-prudential policy implications," Working Paper Series 2110, European Central Bank.

    More about this item

    Keywords

    Credit risk transfer Credit derivatives Public and private information Access to credit Bank competition;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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