Financial intermediation and endogenous risk in the banking sector

Udo Broll, Bernhard Eckwert and Andreas Eickhoff

Economic Modelling, 2012, vol. 29, issue 5, 1618-1622

Abstract: The paper revisits the impact of uncertainty on the decision problem of a bank. The bank extends risky loans to private investors and sells deposits to savers at fixed rates. The uncertainty under which deposit/loan-portfolios are chosen by banks is endogenized through an information system that conveys public signals about the return distribution of bank loans. Transparency in the banking sector is defined in terms of the reliability of these signals. We find that higher transparency always raises expected bank profits, but may lead to a higher or lower expected loan volume. Moreover, higher transparency may reduce economic welfare.

Keywords: Financial intermediation; Market transparency; Banking firm (search for similar items in EconPapers)
JEL-codes: D81 G21 G32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:5:p:1618-1622

DOI: 10.1016/j.econmod.2012.05.015

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