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Bigger is not always safer: a critical analysis of the subadditivity assumption for coherent risk measures

Please always quote using this URN: urn:nbn:de:bvb:20-opus-201808
  • This paper provides a critical analysis of the subadditivity axiom, which is the key condition for coherent risk measures. Contrary to the subadditivity assumption, bank mergers can create extra risk. We begin with an analysis how a merger affects depositors, junior or senior bank creditors, and bank owners. Next it is shown that bank mergers can result in higher payouts having to be made by the deposit insurance scheme. Finally, we demonstrate that if banks are interconnected via interbank loans, a bank merger could lead to additionalThis paper provides a critical analysis of the subadditivity axiom, which is the key condition for coherent risk measures. Contrary to the subadditivity assumption, bank mergers can create extra risk. We begin with an analysis how a merger affects depositors, junior or senior bank creditors, and bank owners. Next it is shown that bank mergers can result in higher payouts having to be made by the deposit insurance scheme. Finally, we demonstrate that if banks are interconnected via interbank loans, a bank merger could lead to additional contagion risks. We conclude that the subadditivity assumption should be rejected, since a subadditive risk measure, by definition, cannot account for such increased risks.show moreshow less

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Metadaten
Author: Hans Rau-Bredow
URN:urn:nbn:de:bvb:20-opus-201808
Document Type:Journal article
Faculties:Wirtschaftswissenschaftliche Fakultät / Betriebswirtschaftliches Institut
Language:English
Parent Title (English):Risks
Year of Completion:2019
Volume:7
Issue:3
Pagenumber:91
Source:Risks 2019, 7(3), 91; https://doi.org/10.3390/risks7030091
DOI:https://doi.org/10.3390/risks7030091
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Tag:bank mergers; coherent risk measures; regulatory capital; subadditivity
JEL-Classification:G Financial Economics / G2 Financial Institutions and Services / G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G Financial Economics / G3 Corporate Finance and Governance / G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G Financial Economics / G3 Corporate Finance and Governance / G34 Mergers; Acquisitions; Restructuring; Corporate Governance
Release Date:2020/03/25
Licence (German):License LogoCC BY: Creative-Commons-Lizenz: Namensnennung 4.0 International