Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25423
Authors: 
Allen, Franklin
Carletti, Elena
Year of Publication: 
2005
Series/Report no.: 
CFS Working Paper 2005/25
Abstract: 
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.
Subjects: 
Financial Innovation
Pareto Inferior
Banking
Insurance
JEL: 
G21
G22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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