Hostname: page-component-7dd5485656-j7khd Total loading time: 0 Render date: 2025-10-31T07:58:24.608Z Has data issue: false hasContentIssue false
  • English
  • Français

DO RISK PREMIA PROTECT AGAINST BANKING CRISES?

Published online by Cambridge University Press:  01 April 2008

HANS GERSBACH  and
JAN WENZELBURGER
HANS GERSBACH*
Affiliation:
ETH Zurich and CEPR
JAN WENZELBURGER
Affiliation:
Keele University
*
Address correspondence to: Hans Gersbach, Center of Economic Research, Eidgenössische Technische Hochschule Zurich, Zürichbergstrasse 18, 8092 Zurich, Switzerland; e-mail: hgersbach@ethz.ch.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping-generations model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks into their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.

Keywords

Financial IntermediationMacroeconomic RisksBanking CrisesRisk PremiaBanking Regulation

Information

Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 100 - 111
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Borio, Claude (2003) Towards a macroprudential framework for financial supervision and regulation. CESifo Economic Studies 49 (2), 181–215.Google Scholar
Boyd, John H. and Prescott, Edward C. (1986) Financial intermediary-coalitions. Journal of Economic Theory 38 (2), 211–232.CrossRefGoogle Scholar
Gersbach, Hans and Wenzelburger, Jan (2004) Do Risk Premia Protect from Banking Crises? Discussion paper 519, Bielefeld University, Germany, and CEPR discussion paper 4935.Google Scholar
Gersbach, Hans and Wenzelburger, Jan (2007) Stability of Banking Systems and Interest-Rate Interventions. Keele Economic Research paper No. 17.Google Scholar
Schreft, Stacey L. and Smith, Bruce D. (1997) Money, banking, and capital formation. Journal of Economic Theory 73 (1), 157–182.Google Scholar
Uhlig, Harald (1995) Transition and Financial Collapse. Discussion paper 66. CentER.Google Scholar
Vives, Xavier (2004) Innovation and Competitive Pressure. CEPR discussion paper 4369.Google Scholar
Williamson, Steve D. (1987) Financial intermediation, business failures, and real business cycles. Journal of Political Economy 95 (6), 1196–1216.CrossRefGoogle Scholar