DP4935 Do Risk Premia Protect from Banking Crises?
|Author(s):||Hans Gersbach, Jan Wenzelburger|
|Publication Date:||February 2005|
|Keyword(s):||banking crises, banking regulation, financial intermediation, macroeconomic risks, risk premia|
|JEL(s):||D41, E40, G20|
|Programme Areas:||International Macroeconomics, Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4935|
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.