Do Risk Premia Protect from Banking Crises?

Hans Gersbach, Jan Wenzelburger
2004 Social Science Research Network  
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 a probability of one. A major cause for this default is that risk premia of a competitive banking system
more » ... ay become too small if the capital base is low. , participants of seminars in Bielefeld, Frankfurt, Helsinki and Toulouse and participants at the conference of Dynamic Macroeconomics in Copenhagen 2004 for valuable comments and suggestions.
doi:10.2139/ssrn.551583 fatcat:mypkxv6f4jaihnuuow33wrttz4