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Do Risk Premia Protect from Banking Crises

  • Hans Gersbach
  • Jan Wenzelburger

This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000356.

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Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:cla:levrem:122247000000000356
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  1. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  2. Uhlig, H.F.H.V.S., 1995. "Transition and Financial Collapse," Discussion Paper 1995-66, Tilburg University, Center for Economic Research.
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  29. repec:tpr:qjecon:v:108:y:1993:i:1:p:77-114 is not listed on IDEAS
  30. Hellwig, Christian, 2002. "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory, Elsevier, vol. 107(2), pages 191-222, December.
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  34. Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
  35. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
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