This dissertation investigates agency problems within risk transfer contracts. We pay particular attention to the consequences of credit risk transfer in the context of banking. The first two chapters provide an introduction and literature review. We then analyze the effect of counterparty risk on
financial insurance contracts in the following two chapters, and uncover a new moral hazard problem on the part of the insurer. If the insurer believes it is unlikely that a claim will be made, it
is advantageous for them to invest in assets which earn higher returns, but may not be readily available if needed. We find that
counterparty risk can create an incentive for the insured to reveal superior information about the risk of their "investment". In particular, a unique separating equilibrium
may exist even in the absence of any signalling device. This constitutes a first example in which the separation of types can
be achieved without a costly signalling device. Our research suggests that regulators should be wary of risk being offloaded to other, possibly unstable parties, especially in financial markets
such as that of credit derivatives.
The fifth chapter models loan sales and loan insurance (e.g. credit default swaps) as two key instruments of risk transfer within the banking environment. Recent empirical evidence suggests that the asymmetric information problem is as relevant in loan
insurance as it is in loan sales. Contrary to previous literature, this paper allows for informational asymmetries in both markets.
Our results show that a well capitalized bank will tend to use loan insurance regardless of loan quality in the presence of moral
hazard and relationship banking costs of loan sales. Finally, we show that a poorly capitalized bank may be forced into the loan
sales market, even in the presence of possibly significant moral hazard and relationship banking costs that can depress the selling price. / Thesis (Ph.D, Economics) -- Queen's University, 2008-09-26 13:03:32.81
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:OKQ.1974/1524 |
| Date | 27 September 2008 |
| Creators | Thompson, JAMES |
| Contributors | Queen's University (Kingston, Ont.). Theses (Queen's University (Kingston, Ont.)) |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English, English |
| Detected Language | English |
| Type | Thesis |
| Format | 498127 bytes, application/pdf |
| Rights | This publication is made available by the authority of the copyright owner solely for the purpose of private study and research and may not be copied or reproduced except as permitted by the copyright laws without written authority from the copyright owner. |
| Relation | Canadian theses |
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