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Multi-bank loan pool contracts: enhancing the profitability of small commercial banks

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  • Andreas Gintschel
  • Andreas Hackethal

Abstract

The study shows that multi-bank loan pool contracts improve the risk-return profile of banks' loan business. Banks write simple contracts on the proceeds from pooled loan portfolios, taking into account the free-rider problems in joint loan production. Thereby especially smaller banks benefit greatly from diversifying credit risk while limiting the efficiency loss due to adverse incentives. Calibration results are presented for a sample of German savings banks: the formation of loan pools reduces the volatility in default rates, proxying for credit risk, of loan portfolios by roughly 80%. Under reasonable assumptions, the gain in return on equity (in certainty equivalent terms) is around 200 basis points annually.

Suggested Citation

  • Andreas Gintschel & Andreas Hackethal, 2004. "Multi-bank loan pool contracts: enhancing the profitability of small commercial banks," Applied Financial Economics, Taylor & Francis Journals, vol. 14(17), pages 1239-1252.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:17:p:1239-1252
    DOI: 10.1080/0960310042000281176
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