Credit Risk Transfer, Delegated Monitoring, Real Sector Productivity, and Financial Deepening

48 Pages Posted: 28 Feb 2005

See all articles by Patrick Behr

Patrick Behr

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Samuel Lee

Goethe University Frankfurt

Date Written: February 21, 2005

Abstract

We examine the effect which credit risk transfer (CRT) markets have on real sector productivity and the volume of financial intermediation in an economy. We find that, despite a reduction in per-firm monitoring, CRT increases productivity in the up-market segment of the real sector but decreases at the lower end. Also, we find that CRT, if optimal, unambiguously fosters financial deepening, that is, it leads to more financial intermediation in the sense that otherwise credit-rationed firms receive access to outside funding. These overall positive effects, however, rely upon the ability of banks to overcome a new type of moral hazard, namely to commit to the optimal amount of CRT. This stems from the fact that a time inconsistency problem arises after deposit contracts are written. Finally, our model predicts that CRT origination should be observed less for high moral hazard loans, for countries where banks are more involved in firms' corporate governance, and for small, regional banks specialized in relationship-intensive loans.

Keywords: banking, credit risk transfer, monitoring

JEL Classification: D82, G21, G32

Suggested Citation

Behr, Patrick and Lee, Samuel, Credit Risk Transfer, Delegated Monitoring, Real Sector Productivity, and Financial Deepening (February 21, 2005). Available at SSRN: https://ssrn.com/abstract=675642 or http://dx.doi.org/10.2139/ssrn.675642

Patrick Behr (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Brazil

Samuel Lee

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany