Credit Risk Transfer and Financial Sector Performance

31 Pages Posted: 20 Dec 2003

See all articles by Wolf Wagner

Wolf Wagner

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

Ian W. Marsh

City University London - Sir John Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 2003

Abstract

In this paper we study the impact of credit risk transfer (CRT) on the stability and the efficiency of a financial system in a model with endogenuous intermediation and production. Our analysis suggests that with respect to CRT, the individual incentives of the agents in the economy are generally aligned with social incentives. Hence, CRT does not pose a systematic challenge to the functioning of the financial system and is generally welfare enhancing. However, we identify issues that should be addressed by the regulatory authorities in order to minimize the potential costs of CRT. These include: ensuring the development of new methods of CRT that allow risk to be more perfectly transferred, setting regulatory standards that reflect differences in the social cost of instability in the banking and insurance sector; promoting CRT instruments that are not detrimental to the monitoring incentives of banks.

Keywords: Credit risk transfer, intermediation, bank risk taking, stability, regulation

JEL Classification: E44, G21, G22, G28

Suggested Citation

Wagner, Wolf and Marsh, Ian William, Credit Risk Transfer and Financial Sector Performance (December 2003). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=478562 or http://dx.doi.org/10.2139/ssrn.478562

Wolf Wagner (Contact Author)

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

Ian William Marsh

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

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