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

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References

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