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What influences banks’ choice of credit risk management practices? Theory and evidence

Dilek Bülbül, Hendrik Hakenes and Claudia Lambert

Journal of Financial Stability, 2019, vol. 40, issue C, 1-14

Abstract: Banks use different risk management practices with varying levels of sophistication. This paper examines the factors that determine the choice of risk-management practices. In a theoretical model, we identify two main determinants for the choice of risk management tools: bank competition and sector concentration in the loan market. We empirically test the predictions of our model using hand-collected data on the credit risk management of 249 German savings banks. The results are in line with our theory: Competition pushes banks to implement advanced risk management practices. Sector concentration in the loan market promotes credit portfolio modeling, but it inhibits credit risk transfer.

Keywords: Banking; Risk management; Credit risk; Credit portfolio modeling; Credit risk transfer (search for similar items in EconPapers)
JEL-codes: G21 L10 (search for similar items in EconPapers)
Date: 2019
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