Multi-bank loan pool contracts: enhancing the profitability of small commercial banks

Andreas Gintschel and Andreas Hackethal

Applied Financial Economics, 2004, vol. 14, issue 17, 1239-1252

Abstract: The study shows that multi-bank loan pool contracts improve the risk-return profile of banks' loan business. Banks write simple contracts on the proceeds from pooled loan portfolios, taking into account the free-rider problems in joint loan production. Thereby especially smaller banks benefit greatly from diversifying credit risk while limiting the efficiency loss due to adverse incentives. Calibration results are presented for a sample of German savings banks: the formation of loan pools reduces the volatility in default rates, proxying for credit risk, of loan portfolios by roughly 80%. Under reasonable assumptions, the gain in return on equity (in certainty equivalent terms) is around 200 basis points annually.

Date: 2004
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DOI: 10.1080/0960310042000281176

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