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Do Risk Premia Protect from Banking Crises

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  • Hans Gersbach
  • Jan Wenzelburger

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.
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Suggested Citation

  • Hans Gersbach & Jan Wenzelburger, 2004. "Do Risk Premia Protect from Banking Crises," Levine's Bibliography 122247000000000356, UCLA Department of Economics.
    • Handle: RePEc:cla:levrem:122247000000000356
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    File URL: http://bieson.ub.uni-bielefeld.de/volltexte/2004/561/pdf/riskPrem.pdf
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    Cited by:

    1. Hans Gersbach & Jan Wenzelburger, 2010. "Sophistication in Risk Management, Bank Equity, and Stability," International Review of Finance, International Review of Finance Ltd., vol. 10(1), pages 63-91, March.
    2. Hans Gersbach & Jan Wenzelburger, 2010. "Sophistication in Risk Management, Bank Equity, and Stability-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 63-91.

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    More about this item

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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