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- Title
DO RISK PREMIA PROTECT AGAINST BANKING CRISES?
- Authors
GERSBACH, HANS; WENZELBURGER, JAN
- Abstract
This paper examines 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-generations model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks into 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.
- Subjects
RISK premiums; BANKING industry; FINANCIAL crises; MACROECONOMICS; BANKING laws; INTERMEDIATION (Finance); PRICING
- Publication
Macroeconomic Dynamics, 2008, Vol 12, Issue S1, p100
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100508070259