Do Risk Premia Protect from Banking Crises?

Hans Gersbach and Jan Wenzelburger ()

No 4935, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Financial intermediation; Macroeconomic risks; Banking crises; Risk premia; Banking regulation (search for similar items in EconPapers)
JEL-codes: D41 E40 G20 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-sea
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Citations: View citations in EconPapers (2)

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Working Paper: Do Risk Premia Protect from Banking Crises (2004)
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