Credit Risk Transfer and Bank Competition

Hendrik Hakenes and Isabel Schnabel

No 2009_33, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: We present a banking model with imperfect competition in which borrowers’ access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans in order to transfer them to other parties, leading to an increase in aggregate risk. Nevertheless, the introduction of CRT generally increases welfare in our setup. However, under private information, higher competition induces an expansion of loans to unprofitable firms, which in the limit offsets the welfare gains from CRT completely.

Keywords: access to credit; bank competition; credit derivatives; Credit risk transfer; public and private information (search for similar items in EconPapers)
JEL-codes: G13 G21 L11 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-ban, nep-com, nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Credit risk transfer and bank competition (2010)
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