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| Credit Risk Transfer and Financial Sector Performance by Wolf Wagner of Cambridge University, and December 12, 2003 Abstract: In this paper we study the impact of credit risk transfer (CRT) on the stability and the efficiency of a financial system in a model with endogenous intermediation and production. Our analysis suggests that with respect to CRT, the individual incentives of the agents in the economy are generally aligned with social incentives. Hence, CRT does not pose a systematic challenge to the functioning of the financial system and is generally welfare enhancing. However, we identify issues that should be addressed by the regulatory authorities in order to minimize the potential costs of CRT. These include: ensuring the development of new methods of CRT that allow risk to be more perfectly transferred, setting regulatory standards that reflect differences in the social cost of instability in the banking and insurance sector; promoting CRT instruments that are not detrimental to the monitoring incentives of banks. Books Referenced in this Paper: (what is this?)
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