Based on the statements provided, (d) Bankers do not like to share good things and will only share bad things follows. The premises are positive and universal (logically speaking. No actual verification of fact or truth is needed to answer the question :P) so the sentence should be universal affirmative and does not need the middle term.
One of the first things most parents teach their little children while growing up is how to share and not be selfish or greedy. Well it appears that the children that are never taught, or who refuse to learn, this selfless character trait become bankers on Wall Street (a la Gordon Gekko). So when greed becomes good, sharing something – or anything – that is good just cannot be possible – or can it? Maybe that is why the banks’ propensity to ‘share’ risks is something that can’t be good by the very definition or understanding of the people offering to share it (and hence the reason it is shared in the first place).
Credit default swaps, along with the wide swath of other financial instruments and derivatives utilized by banks the world round, have long been positioned (at least pubicly) as a valuable risk management and sharing tool that helps individual banks (or other writers of CDS) hedge or offset some of their inherent long credit exposures. Much like an insurance company seeking out excess or proportional reinsurance from a third-party to help hedge or offset some of its overall disaster risk, banks often seek out third-parties such as other banks, insurers, or funds to buy CDS from and offset some of their overall credit risks .
There is some research that has gone into this old school of thought and the findings may actually appear to be contrary to historical (and popular) opinion. Below is an abstract and conclusion from a research paper by Domenico Delli Gatti, Mauro Gallegati, Bruce C. Greenwald, Joseph E. Stiglitz entitled Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk.
We characterize the evolution over time of a network of credit relations among financial agents as a system of coupled stochastic processes. Each process describes the dynamics of individual financial robustness, while the coupling results from a network of liabilities among agents. The average level of risk diversification of the agents coincides with the density of links in the network. In addition to a process of diffusion of financial distress, we also consider a discrete process of default cascade, due to the re-evaluation of agents’ assets. In this framework we investigate the probability of individual defaults as well as the probability of systemic default as a function of the network density. While it is usually thought that diversification of risk always leads to a more stable financial system, in our model a tension emerges between individual risk and systemic risk. As the number of counterparties in the credit network increases beyond a certain value, the default probability, both individual and systemic, starts to increase. This tension originates from the fact that agents are subject to a financial accelerator mechanism. In other words, individual financial fragility feeding back on itself may amplify the effect of an initial shock and lead to a full fledged systemic crisis. The results offer a simple possible explanation for the endogenous emergence of systemic risk in a credit network…….
In this paper, we have characterized the evolution over time of a credit network in the mostgeneral terms as a system of coupled stochastic processes, each one of which describesthe dynamics of individual financial robustness. The coupling comes from the fact that agents assets are other agents’ liabilities. Thus each agent’s financial robustness is interdependent with the financial robustness of the counterparties. through risk sharing but also through the diffusion of financial distress as well as bankruptcy cascades.We find that in the presence of financial accelerator, the positive feedback of financial robustness on itself, together with the other externalities represented by distress propagation and bankruptcy cascades may more than offset the stabilizing role of risk sharing and amplify the effects of a shock to a single node of the network, leading to a full fledged systemic crisis.The relationship between the probability of failure both individual as well as sytemic,and connectivity is U-shaped. The stabilizing role of risk diversification prevails onlywhen connectivity is low. If connectivity is already high, a further increase may have the perverse effect of amplifying the shock due to distress propagation and financial accelerator.
Mark Buchanan has done a nice little summary available on his Physics of Finance blog after going through a few papers on the topic. He highlights both trains of thought on the subject (risk-sharing).
Note that they are making a distinction between two kinds of risk: 1. individual risk, arising from factors specific to one bank’s business and which can make it go bankrupt, and 2. systemic risk, arising from the propagation of financial distress through the system. As in Allen and Gale, they find that individual risk DOES decrease with increasing connectivity: banks become more resistant to shocks coming from their own business, but that systemic risk DOES NOT decrease. The latter risk increases with higher connectivity, and can win out in determining the overall chance a bank might go bankrupt. In effect, the effort on the part of many banks to manage their own risks can end up creating a new systemic risk that is worse than the risk they have reduced through risk sharing.
and ends his piece with a note about the globalization of banking and other financial services and perhaps one way to help explain the far-reaching effects and worries about the current Greek and general Eurozone financial crisis.
International risk sharing may prevail in the early stage of globalization, i.e. when connectivity is relatively ”low”. An increase in connectivity at this stage therefore may be beneficial. On the other hand, if connectivity is already high, i.e. in the mature stage of globalization, an increase in connectivity may bring to the fore the internationalization of financial distress. An increase in connectivity, in other words, may increase the likelihood of financial crises worldwide.