Bank fragility and the incentives to manage risk

Toni Ahnert, Christoph Bertsch, Agnese Leonello and Robert Marquez
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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 banks’ ability to raise liquidity at short notice can lead to depositor panics, as evidenced by recent bank failures. Why don’t banks take a more active role in managing these risks? In a standard bank-run model, we show that risk management failures are most prevalent when exposures are more severe and managing risk would be particularly valuable. Bank capital and deposit insurance coverage act as substitutes for risk management on the intensive margin but as complements on its extensive margin, encouraging the adoption of risk management operations. We provide insights for the appropriate regulation of bank risk-management operations.

Keywords: Banking crises; depositor withdrawals; asset valuations; risk management (search for similar items in EconPapers)
JEL-codes: G01 G21 G23 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2024-09-01
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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