Sophistication in Risk Management, Bank Equity, and Stability

Jan Wenzelburger () and Hans Gersbach

No KERP 2007/08, Keele Economics Research Papers from Centre for Economic Research, Keele University

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 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.

Keywords: Financial intermediation; macroeconomic risks; risk management; risk premia; banking regulation; rating. (search for similar items in EconPapers)
JEL-codes: D40 E44 G21 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-08
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac, nep-reg and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.keele.ac.uk/depts/ec/wpapers/kerp0708.pdf (application/pdf)

Related works:
Journal Article: Sophistication in Risk Management, Bank Equity, and Stability* (2010)
Working Paper: Sophistication in Risk Management, Bank Equity, and Stability (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kee:kerpuk:2007/08

Ordering information: This working paper can be ordered from
Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Access Statistics for this paper

More papers in Keele Economics Research Papers from Centre for Economic Research, Keele University Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Martin E. Diedrich ( this e-mail address is bad, please contact ).