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Risk management under a prudential policy

Listed author(s):
  • Hirbod Assa

    ()

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    In this paper, we study the structure of optimal contracts in banking system when there is no risk of moral hazard. We consider a risk management problem under a policy that reduces the excessive risk-taking behavior by making all banks bear part of the risk that they transfer to other parties in the market. First, we characterize the optimal solutions to the risk management problem, and, second, we find a necessary and sufficient condition under which the “risk of the tail events” will not be transferred. In particular, we will study the problem using two known risk measures, value at risk and conditional value at risk, and will show that in these cases, the optimal solutions are in the form of stop-loss policies. Copyright Springer-Verlag Italia 2015

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    File URL: http://hdl.handle.net/10.1007/s10203-015-0165-x
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    Article provided by Springer & Associazione per la Matematica in its journal Decisions in Economics and Finance.

    Volume (Year): 38 (2015)
    Issue (Month): 2 (October)
    Pages: 217-230

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    Handle: RePEc:spr:decfin:v:38:y:2015:i:2:p:217-230
    DOI: 10.1007/s10203-015-0165-x
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    1. George G. Kaufman, 1988. "Bank Runs: Causes, Benefits, and Costs," Cato Journal, Cato Journal, Cato Institute, vol. 7(3), pages 559-594, Winter.
    2. Kevin Dowd, 2009. "Moral Hazard and the Financial Crisis," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 141-166, Winter.
    3. Rama Cont & Romain Deguest & Giacomo Scandolo, 2010. "Robustness and sensitivity analysis of risk measurement procedures," Post-Print hal-00413729, HAL.
    4. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 529-571, May.
    5. Carole Bernard & Weidong Tian, 2009. "Optimal Reinsurance Arrangements Under Tail Risk Measures," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 709-725.
    6. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    7. Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
    8. Wu, Xianyi & Zhou, Xian, 2006. "A new characterization of distortion premiums via countable additivity for comonotonic risks," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 324-334, April.
    9. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, January.
    10. Rama Cont & Romain Deguest & Giacomo Scandolo, 2010. "Robustness and sensitivity analysis of risk measurement procedures," Quantitative Finance, Taylor & Francis Journals, vol. 10(6), pages 593-606.
    11. Dowd, Kevin, 1996. "The Case for Financial Laissez-Faire," Economic Journal, Royal Economic Society, vol. 106(436), pages 679-687, May.
    12. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
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