Download This PaperDo Risk Premia Protect from Banking Crises?
University of Bielefeld Working Paper No. 519
28 Pages Posted: 27 May 2004
There are 2 versions of this paper
Do Risk Premia Protect from Banking Crises?
Date Written: May 2004
Abstract
This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks.
We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with a probability of one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low.
Keywords: Financial intermediation, macroeconomic risks, banking crises, risk premia, banking regulation
JEL Classification: D41, E4, G2
Suggested Citation: Suggested Citation
IZA Institute of Labor Economics
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CESifo (Center for Economic Studies and Ifo Institute)
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