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
Englisch

Bibliographic citation
Series: ECONtribute Discussion Paper ; No. 294

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

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

Last update
10.03.2025, 11:43 AM CET

Data provider

This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.

Object type

  • Arbeitspapier

Associated

  • Mitkov, Yuliyan
  • Schüwer, Ulrich
  • University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)

Time of origin

  • 2024

Other Objects (12)