Sophistication in Risk Management, Bank Equity, and Stability-super-
We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system that uses an average rating 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 may be lower. As an economy with a sophisticated banking system invests its funds more efficiently, there is a trade-off between efficiency and stability of a banking system. Copyright (c) 2010 The Authors. Journal compilation (c) International Review of Finance Ltd. 2010.
Year of publication: |
2010
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Authors: | GERSBACH, HANS ; WENZELBURGER, JAN |
Published in: |
International Review of Finance. - International Review of Finance Ltd., ISSN 1369-412X. - Vol. 10.2010, s1, p. 63-91
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Publisher: |
International Review of Finance Ltd. |
Saved in:
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