The Marketability of Bank Assets and Managerial Rents: Implications for Financial Stability

36 Pages Posted: 8 Jun 2016

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: 2007

Abstract

Ongoing financial innovation and greater information availability increase the tradability of bank assets and reduce banks' dependence on individual bank managers as private information in the lending process declines. In this paper we argue that this has two effects on banks, with opposing implications for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks' capital structure needs to be less concerned with disciplining the management. Deposits -the most effective disciplining device- can be reduced, increasing banks' resilience to adverse return shocks. However, limiting the hold-up problem also diminishes bank managers' rents, reducing their incentives to properly monitor and screen borrowers, with adverse implications for asset quality. Thus, even though the improved marketability of bank assets allows banks to adopt a safer capital structure, the default risk of banks does not necessarily decline.

Keywords: Marketability, Incentives, Financial Innovations, Financial Stability

JEL Classification: G32, G21, G28

Suggested Citation

Fecht, Falko and Wagner, Wolf, The Marketability of Bank Assets and Managerial Rents: Implications for Financial Stability (2007). Bundesbank Series 2 Discussion Paper No. 2007,12. Available at SSRN: https://ssrn.com/abstract=2793998

Falko Fecht (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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