EconPapers    
Economics at your fingertips  
 

Optimal Credit Risk Transfer, Monitored Finance, and Banks

Gabriella Chiesa ()

No 811, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We examine the implications of optimal credit risk transfer (CRT) for bank-loan monitoring, and the incentives for banks to engage in optimal CRT. In our model, properly designed CRT instruments allow banks to insure themselves against loan losses precisely in those states that signal monitoring. We find that optimal CRT enhances loan monitoring and expands financial intermediation, in contrast to the findings of the previous literature. Optimal CRT instruments are based on loan portfolios rather than individual loans and have credit enhancement guarantees, pretty much as banks do in practice. But the extent of credit enhancement needs to be precisely delimited. Above that exact level, monitoring incentives are undermined (loan quality deteriorates) and wealth is transferred from the bank’s financiers to the bank. Properly designed risk-based capital requirements are shown to prevent such a wealth transfer and to provide banks with the incentive to engage in optimal CRT.

Pages: 27 pages
Date: 2008, Revised 2008-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39) Track citations by RSS feed

Downloads: (external link)
http://www.eief.it/files/2012/09/wp-11-optimal-cre ... inance-and-banks.pdf (application/pdf)

Related works:
Journal Article: Optimal credit risk transfer, monitored finance, and banks (2008) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:0811

Access Statistics for this paper

More papers in EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF) Contact information at EDIRC.
Bibliographic data for series maintained by Facundo Piguillem ().

 
Page updated 2020-12-02
Handle: RePEc:eie:wpaper:0811