Sophistication in Risk Management, Bank Equity, and Stability
We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks with low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system.
|Date of creation:||Aug 2007|
|Contact details of provider:|| Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom|
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
Web page: http://www.keele.ac.uk/depts/ec/cer/
More information through EDIRC
|Order Information:|| Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom|
Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- Gersbach, Hans & Uhlig, Harald, 2006. "Debt contracts and collapse as competition phenomena," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 556-574, October.
- Krahnen, Jan Pieter & Weber, Martin, 2001.
"Generally accepted rating principles: A primer,"
Journal of Banking & Finance,
Elsevier, vol. 25(1), pages 3-23, January.
- Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
- Hans Gersbach & Jan Wenzelburger, 2004.
"Do Risk Premia Protect from Banking Crises,"
122247000000000356, UCLA Department of Economics.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006.
"Using Market Information for Banking System Risk Assessment,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 2(1), March.
- Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany.
- Harald Uhlig, 1996.
"A law of large numbers for large economies (*),"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 41-50.
- Guenter Franke & Jan Pieter Krahnen, 2005.
"Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations,"
NBER Working Papers
11741, National Bureau of Economic Research, Inc.
- Gunter Franke & Jan Pieter Krahnen, 2007. "Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Chapters, in: The Risks of Financial Institutions, pages 603-634 National Bureau of Economic Research, Inc.
- Günter Franke & Jan Pieter Krahnen, 2005. "Default risk sharing between banks and markets: the contribution of collateralized debt obligations," CoFE Discussion Paper 05-04, Center of Finance and Econometrics, University of Konstanz.
- Franke, Günter & Krahnen, Jan Pieter, 2005. "Default risk sharing between banks and markets: The contribution of collateralized debt obligations," CFS Working Paper Series 2005/06, Center for Financial Studies (CFS).
- Bhattacharya, Sudipto & Boot, Arnoud W.A. & Thakor, Anjan V., 1995.
"The economics of bank regulation,"
DEE - Working Papers. Business Economics. WB
7082, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
- Gehrig, Thomas & Stenbacka, Rune, 2001. "Screening Cycles," CEPR Discussion Papers 2915, C.E.P.R. Discussion Papers.
- Al-Najjar, Nabil Ibraheem, 1995. "Decomposition and Characterization of Risk with a Continuum of Random Variables," Econometrica, Econometric Society, vol. 63(5), pages 1195-1224, September.
When requesting a correction, please mention this item's handle: RePEc:kee:kerpuk:2007/08. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin E. Diedrich)
If references are entirely missing, you can add them using this form.