Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 441: Bank fragility and risk management

Toni Ahnert, Christoph Bertsch (), Agnese Leonello and Robert Marquez
Additional contact information
Toni Ahnert: European Central Bank
Christoph Bertsch: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Agnese Leonello: European Central Bank
Robert Marquez: University of California, Davis

Abstract: Shocks to a bank’s ability to raise liquidity at short notice can trigger depositor panics. Why don’t banks take a more active role in managing these risks? We study contingent risk management (hedging) in a standard global-games model of a bank run. Banks fail to hedge precisely when the exposure to a shock is most severe, just when risk management would have the biggest impact. Higher bank capital and broader deposit-insurance coverage crowd out hedging by banks that already manage risk, yet encourage more banks to establish risk management desks in the first place. The model also yields testable implications for hedging incentives and policy design.

Keywords: Bank runs; liquidity risk; hedging; interim asset valuation

JEL-codes: G01; G21; G23

Language: English

64 pages, First version: September 1, 2024. Revised: June 1, 2025. Earlier revisions: June 1, 2025.

Full text files 

no.-441-bank-fragili...pdated-june-2025.pdf PDF-file Full text

Download statistics

Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:rbnkwp:0441This page generated on 2025-06-16 08:46:49.