Bank fragility and risk management

Toni Ahnert, Christoph Bertsch, Agnese Leonello and Robert Marquez

No 3076, Working Paper Series from European Central Bank

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. JEL Classification: G01, G21, G23

Keywords: bank runs; hedging; interim asset valuation; liquidity risk (search for similar items in EconPapers)
Date: 2025-07
Note: 848910
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253076

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