Do Risk Premia Protect from Banking Crises?

Gersbach, Hans; Wenzelburger, Jan

doi:10.2139/ssrn.551583

Do Risk Premia Protect from Banking Crises?

University of Bielefeld Working Paper No. 519

28 Pages Posted: 27 May 2004

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Jan Wenzelburger

Bielefeld University - Department of Business Administration and Economics

There are 2 versions of this paper

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

Gersbach, Hans and Wenzelburger, Jan, Do Risk Premia Protect from Banking Crises? (May 2004). University of Bielefeld Working Paper No. 519, Available at SSRN: https://ssrn.com/abstract=551583 or http://dx.doi.org/10.2139/ssrn.551583