On the relationship between borrower and bank risk

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 294

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Interest Rates: Determination, Term Structure, and Effects
• Subject: Correlated defaults ; borrower heterogeneity ; bank failure ; survival analysis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mitkov, Yuliyan ; Schüwer, Ulrich
• Event: Veröffentlichung
• (who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (where): Bonn and Cologne
• (when): 2024

Further information

• Last update: 10.03.2025, 11:43 AM CET