Arbeitspapier
On the relationship between borrower and bank risk
We use tools from survival analysis to study the equilibrium probability of bank failure in a model with imperfect correlation in loan defaults where a systematic risk factor and idiosyncratic frailty factors govern borrower credit worth. We derive several surprising results: in equilibrium, a bank can be more likely to fail with less risky than with more risky borrowers. In addition, the equilibrium relationship between borrower and bank risk can be fundamentally altered by a greater dispersion of the frailty factors, similar to how mixing items of different durability can fundamentally change the overall aging pattern.
- Language
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Englisch
- Bibliographic citation
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Series: ECONtribute Discussion Paper ; No. 294
- Classification
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Wirtschaft
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation
Interest Rates: Determination, Term Structure, and Effects
- Subject
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Correlated defaults
borrower heterogeneity
bank failure
survival analysis
- Event
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Geistige Schöpfung
- (who)
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Mitkov, Yuliyan
Schüwer, Ulrich
- Event
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Veröffentlichung
- (who)
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University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
- (where)
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Bonn and Cologne
- (when)
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2024
- Last update
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10.03.2025, 11:43 AM CET
Data provider
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Object type
- Arbeitspapier
Associated
- Mitkov, Yuliyan
- Schüwer, Ulrich
- University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
Time of origin
- 2024