Working Paper: CEPR ID: DP4935
Authors: Hans Gersbach; Jan Wenzelburger
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: banking crises; banking regulation; financial intermediation; macroeconomic risks; risk premia
JEL Codes: D41; E40; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Risk Premia (G19) | Bank Capital (G21) |
| Bank Capital (G21) | Probability of Banking Crisis (G01) |
| Low Bank Capital (G21) | Risk Premia (G19) |
| Risk Premia (G19) | Probability of Banking System Default (G21) |
| Bank Capital below Critical Threshold (F65) | Banking System Default (G21) |
| Negative Macroeconomic Shocks (E39) | Bank Capital (G21) |