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)

Ian W. Marsh

City University London - The 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) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Ian William Marsh

City University London - The 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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