Do Risk Premia Protect from Banking Crises?

37 Pages Posted: 18 Jul 2005

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

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 probability 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, E40, G20

Suggested Citation

Gersbach, Hans and Wenzelburger, Jan, Do Risk Premia Protect from Banking Crises? (February 2005). Available at SSRN: https://ssrn.com/abstract=763584

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Jan Wenzelburger

Bielefeld University - Department of Business Administration and Economics ( email )

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