Post by Sapphire Capital on Jan 5, 2009 22:08:57 GMT 4
Sophistication in Risk Management, Bank Equity, and Stability
Hans Gersbach
Swiss Federal Institute of Technology Zurich, (CER-ETH); Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)
Jan Wenzelburger
Keele University - Center for Economic Research
June 2007
CEPR Discussion Paper No. DP6353
Abstract:
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 by 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.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1136679
Hans Gersbach
Swiss Federal Institute of Technology Zurich, (CER-ETH); Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)
Jan Wenzelburger
Keele University - Center for Economic Research
June 2007
CEPR Discussion Paper No. DP6353
Abstract:
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 by 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.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1136679