Credit risk transfer and contagion

Source
Science Direct

Some have argued that recent increases in credit risk transfer are desirable because they improve the diversification of risk. Others have suggested that they may be undesirable if they increase the risk of financial crises. Using a model with banking and insurance sectors, we show that credit risk transfer can be beneficial when banks face uniform demand for liquidity. However, when they face idiosyncratic liquidity risk and hedge this risk in an interbank market, credit risk transfer can be detrimental to welfare. It can lead to contagion between the two sectors and increase the risk of crises. To avail of this paper, please contact the Society on info@actuaries.ie.

Length of Resource
23 pages
Author
Franklin Allen, Elena Carletti
Date Published
Publication Type
article
Resource Type
academic

ResourceID: 178505

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