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Do Risk Premia Protect from Banking Crises?

  • Gersbach, Hans
  • Wenzelburger, Jan

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4935.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4935
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