Credit Risk and Credit Derivatives in Banking

Udo Broll (), Thilo Pausch and Peter Welzel ()

No 228, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: Using the industrial economics approach to the microeconomics of banking we analyze a large bank under credit risk. Our aim is to study how a risky loan portfolio affects optimal bank behavior in the loan and deposit markets, when credit derivatives to hedge credit risk are available. We examine hedging without and with basis risk. In the absence of basis risk the usual separation result is confirmed. In case of basis risk, however, we find a weaker notion of separation.

Keywords: credit risk; credit derivatives; banking firm; risk aversion (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2002-08
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