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What influences banks’ choice of credit risk management practices? Theory and evidence

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  • Bülbül, Dilek
  • Hakenes, Hendrik
  • Lambert, Claudia

Abstract

Banks use different risk management practices with varying levels of sophistication. This paper examines the factors that determine the choice of risk-management practices. In a theoretical model, we identify two main determinants for the choice of risk management tools: bank competition and sector concentration in the loan market. We empirically test the predictions of our model using hand-collected data on the credit risk management of 249 German savings banks. The results are in line with our theory: Competition pushes banks to implement advanced risk management practices. Sector concentration in the loan market promotes credit portfolio modeling, but it inhibits credit risk transfer.

Suggested Citation

  • Bülbül, Dilek & Hakenes, Hendrik & Lambert, Claudia, 2019. "What influences banks’ choice of credit risk management practices? Theory and evidence," Journal of Financial Stability, Elsevier, vol. 40(C), pages 1-14.
    • Handle: RePEc:eee:finsta:v:40:y:2019:i:c:p:1-14
    DOI: 10.1016/j.jfs.2018.11.002
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    More about this item

    Keywords

    Banking; Risk management; Credit risk; Credit portfolio modeling; Credit risk transfer;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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