Credit Risk Transfer and Bank Competition
47 Pages Posted: 7 Nov 2009
Date Written: October 2009
We present a banking model with imperfect competition in which borrowers’ access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans in order to transfer them to other parties, leading to an increase in aggregate risk. Nevertheless, the introduction of CRT generally increases welfare in our setup. However, under private information, higher competition induces an expansion of loans to unprofitable firms, which in the limit offsets the welfare gains from CRT completely.
Keywords: access to credit, bank competition, credit derivatives, Credit risk transfer, public and private information
JEL Classification: G13, G21, L11
Suggested Citation: Suggested Citation