34 Pages Posted: 18 Mar 2004
Date Written: February 2004
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 endogenous 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. We identify issues that should be addressed by the regulatory authorities in order to minimize the potential costs of CRT. These include: ensuring regulatory standards that reflect differences in the social cost of instability in the banking and insurance sector; and promoting CRT instruments that are not detrimental to the monitoring incentives of banks.
Keywords: Credit risk transfer, efficiency, intermediation, stability
JEL Classification: G21, G22, G28
Suggested Citation: Suggested Citation
Wagner, Wolf and Marsh, Ian W., Credit Risk Transfer and Financial Sector Performance (February 2004). CEPR Discussion Paper No. 4265; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=519101 or http://dx.doi.org/10.2139/ssrn.519101
By Wolf Wagner