Credit risk transfer and bank competition

Arbeitspapier

We present a banking model with imperfect competition in which borrowers' access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans in order to transfer them to other parties, leading to an increase in aggregate risk. Nevertheless, the introduction of CRT generally increases welfare in our setup. However, under private information, higher competition induces an expansion of loans to unprofitable firms, which in the limit offsets the welfare gains from CRT completely.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Preprints of the Max Planck Institute for Research on Collective Goods ; No. 2009,33

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Production, Pricing, and Market Structure; Size Distribution of Firms ; Contingent Pricing; Futures Pricing; option pricing
• Subject: Credit risk transfer ; credit derivatives ; public and private information ; access to credit ; bank competition

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hakenes, Hendrik ; Schnabel, Isabel
• Event: Veröffentlichung
• (who): Max Planck Institute for Research on Collective Goods
• (where): Bonn
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/32255
• Last update: 10.03.2025, 11:45 AM CET