Bigger Is Not Always Safer: A Critical Analysis of the Subadditivity Assumption for Coherent Risk Measures

Bigger Is Not Always Safer: A Critical Analysis of the Subadditivity Assumption for Coherent Risk Measures

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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 Jodhpur Boots 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 Soccer - Field Equipment - Accessories 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.