Abstract - Credit Risk Transfer in Banking Markets with Hard and Soft Information

Banks grant loans on the basis of hard or soft information; this fact crucially influences their ability to transfer the according credit risk. Using a straightforward bank competition model, we show that, absent a market for credit risk transfer (CRT), the shadow price of CRT would be higher for soft-information loans. A market for CRT for hard-information loans works frictionless and improves access to finance for risky borrowers. A market for CRT for soft-information loans either breaks down or operates at a comparably low volume: banks start to grant loans with negative NPV (subprime), transfer the according risk, and hence pay a premium for the CRT. Access to finance in the economy improves slightly, but aggregate risk increases considerably.

Hendrik Hakenes(speaker), Isabel Schnabel
University of Hannover and MPI Bonn
08.Jan 2008

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