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Bank fragility and risk management

Author

Listed:
  • Ahnert, Toni

    (European Central Bank)

  • Bertsch, Christoph

    (Research Department, Central Bank of Sweden)

  • Leonello, Agnese

    (European Central Bank)

  • Marquez, Robert

    (University of California, Davis)

Abstract

Shocks to a bank’s ability to raise liquidity at short notice can trigger depositor panics. Why don’t banks take a more active role in managing these risks? We study contingent risk management (hedging) in a standard global-games model of a bank run. Banks fail to hedge precisely when the exposure to a shock is most severe, just when risk management would have the biggest impact. Higher bank capital and broader deposit-insurance coverage crowd out hedging by banks that already manage risk, yet encourage more banks to establish risk management desks in the first place. The model also yields testable implications for hedging incentives and policy design.

Suggested Citation

  • Ahnert, Toni & Bertsch, Christoph & Leonello, Agnese & Marquez, Robert, 2024. "Bank fragility and risk management," Working Paper Series 441, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2025.
    • Handle: RePEc:hhs:rbnkwp:0441
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    File URL: https://www.riksbank.se/globalassets/media/rapporter/working-papers/2025/no.-441-bank-fragility-and-risk-management-updated-june-2025.pdf
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    More about this item

    Keywords

    Bank runs; liquidity risk; hedging; interim asset valuation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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