Abstract

We use a model of a bank under perfect competition to examine effects of derivatives for tradeable and non tradeable risks on optimal bank behavior in the deposit and loan markets. If both credit risk and interest risk are tradeable, we identify simple decision rules which require only market and cost data for setting deposit and loan volumes optimally. In the case of non tradeable risks, however, optimal behavior also depends on the degree of risk aversion, the distributions of random variables and the financial resources of the bank. Simple decision rules then no longer exist.

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