Do Banks Take too much Risk?
1994 (English)Report (Other academic)
The paper analyzes the lending decisions of banks whose role is to sort out and finance profitable projects. Depositors cannot observe the lending policy of banks. This gives banks incentive to exploit their limited liability and take too much risk. On the other hand, limited liability of entrepeneurs prevents banks from appropriating the entire value of their information production, this leaning towards under-investment. One cannot generally tell which effect dominates, it depends on the size of future bank rents, and to what extent private bankruptcy costs represent social costs of bank failure. Increased competition may not increase risk-taking by banks. Because banks take future profits into account, new entry into banking might induce banks to become more conservative.
Place, publisher, year, edition, pages
Stockholm: IIES , 1994. , 52 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 568
IdentifiersURN: urn:nbn:se:su:diva-41892OAI: oai:DiVA.org:su-41892DiVA: diva2:342801