Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19771
Authors: 
Fecht, Falko
Wagner, Wolf
Year of Publication: 
2007
Series/Report no.: 
Discussion Paper, Series 2: Banking and Financial Supervision 2007,12
Abstract: 
Ongoing financial innovation and greater information availability increase the tradability of bank assets and reduce banks' dependence on individual bank managers as private information in the lending process declines. In this paper we argue that this has two effects on banks, with opposing implications for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks' capital structure needs to be less concerned with disciplining the management. Deposits -the most effective disciplining device- can be reduced, increasing banks' resilience to adverse return shocks. However, limiting the hold-up problem also diminishes bank managers' rents, reducing their incentives to properly monitor and screen borrowers, with adverse implications for asset quality. Thus, even though the improved marketability of bank assets allows banks to adopt a safer capital structure, the default risk of banks does not necessarily decline.
Subjects: 
Marketability
Incentives
Financial Innovations
Financial Stability
JEL: 
G32
G21
G28
Document Type: 
Working Paper

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