What Influences Banks' Choice of Risk Management Tools? Theory and Evidence

57 Pages Posted: 7 Dec 2013 Last revised: 31 Jan 2014

See all articles by Dilek Bulbul

Dilek Bulbul

Goethe University Frankfurt - House of Finance

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Claudia Lambert

European Central Bank (ECB)

Date Written: December 6, 2013

Abstract

This paper investigates the factors influencing banks' decision to engage in advanced risk management, from both a theoretical and an empirical perspective. In recent decades, credit risk management in banks has become highly sophisticated and banks have become more active and advanced in the management of credit risks. We identify two driving factors for risk management: bank competition and sector concentration in the loan market. We find empirical support for our hypotheses, using a unique data set of 249 German banks; parts of the data set are hand-collected. Bank competition pushes banks to implement advanced risk management. Sector concentration in the loan market promotes credit portfolio modeling, but inhibits credit risk transfer.

Keywords: risk management, credit risk, credit portfolio modeling, credit risk transfer

JEL Classification: G21, L10

Suggested Citation

Bulbul, Dilek and Hakenes, Hendrik and Lambert, Claudia, What Influences Banks' Choice of Risk Management Tools? Theory and Evidence (December 6, 2013). DIW Berlin Discussion Paper No. 1349. Available at SSRN: https://ssrn.com/abstract=2364448 or http://dx.doi.org/10.2139/ssrn.2364448

Dilek Bulbul (Contact Author)

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323
Germany

Hendrik Hakenes

Finance Group ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Claudia Lambert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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