On the Relationship between Borrower and Bank risk

Yuliyan Mitkov () and Ulrich Schüwer ()
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Yuliyan Mitkov: University of Bonn
Ulrich Schüwer: Goethe University Frankfurt

No 294, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We use tools from survival analysis to study the equilibrium probability of bank failure in a model with imperfect correlation in loan defaults where a systematic risk factor and idiosyncratic frailty factors govern borrower credit worth. We derive several surprising results: in equilibrium, a bank can be more likely to fail with less risky than with more risky borrowers. In addition, the equilibrium relationship between borrower and bank risk can be fundamentally altered by a greater dispersion of the frailty factors, similar to how mixing items of different durability can fundamentally change the overall aging pattern.

Keywords: Correlated defaults; borrower heterogeneity; bank failure; survival analysis (search for similar items in EconPapers)
JEL-codes: E43 G21 G28 (search for similar items in EconPapers)
Pages: 32
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:294

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