Bank fragility and risk management

Toni Ahnert, Christoph Bertsch, Agnese Leonello and Robert Marquez
Additional contact information
Agnese Leonello: European Central Bank
Robert Marquez: University of California, Davis

No 441, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: Shocks to a bank’s ability to raise liquidity at short notice can trigger depositor panics. Why don’t banks take a more active role in managing these risks? We study contingent risk management (hedging) in a standard global-games model of a bank run. Banks fail to hedge precisely when the exposure to a shock is most severe, just when risk management would have the biggest impact. Higher bank capital and broader deposit-insurance coverage crowd out hedging by banks that already manage risk, yet encourage more banks to establish risk management desks in the first place. The model also yields testable implications for hedging incentives and policy design.

Keywords: Bank runs; liquidity risk; hedging; interim asset valuation (search for similar items in EconPapers)
JEL-codes: G01 G21 G23 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2024-09-01, Revised 2025-06-01
New Economics Papers: this item is included in nep-ban, nep-eur, nep-fdg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0441

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