Resource title

The marketability of bank assets and managerial rents: implications for financial stability

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Resource description

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.

Resource author

Falko Fecht, Wolf Wagner

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19771

Resource license

Adapt according to the presented license agreement and reference the original author.