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Bank's Assets and Liabilities Management with Multiple Sources of Risk

Abstract

The industrial organization approach to banking is applied to analyze theeffects of the introduction of joint credit and interbank rate risk on the optimaldecisions on deposits and loans of a competitive bank. It is found that dueto the introduction of both sources of risk there appear direct effects as wellas portfolio effects which jointly determine changes in the bank’s behavior.Moreover, it is shown that there is an interaction between the effects of theintroduction of risk and economies or diseconomies of scope in the bank’sbusiness which determines the extend of behavioral changes.

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File URL: http://www.wiwi.uni-augsburg.de/vwl/institut/paper/245.pdf
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Paper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 245.

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Length: pages
Date of creation: Jul 2003
Handle: RePEc:aug:augsbe:0245
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Keywords: bank; risk; risk aversion; decisions with multiple sources of risk;

Find related papers by JEL classification:

  • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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  1. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
  2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  3. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
  5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  6. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  7. Moschini, Giancarlo & Lapan, Harvey, 1995. "The Hedging Role of Options and Futures under Joint Price, Basis, and Production Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 1025-1049, November.
  8. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, July.
  9. Thilo Pausch & Peter Welzel, 2002. "Credit Risk and the Role of Capital Adequacy Regulation," Discussion Paper Series 224, Universitaet Augsburg, Institute for Economics.
  10. Kraus, Marvin, 1979. "A comparative statics theorem for choice under risk," Journal of Economic Theory, Elsevier, vol. 21(3), pages 510-517, December.
  11. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
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