Moral hazard and the financial structure of banks (original) (raw)

Risk shifting in the US banking system: An empirical analysis

Journal of Financial Stability, 2014

This paper contributes to the empirical literature on risk shifting. It proposes a method to find out whether risk shifting is present in the banking industry and, if so, what type. The type of risk shifting depends on the group of debt holders to whom risk is shifted. We apply this method to the US banking sector in 1998-2011. To study the relationship between risk shifting and the 2008 crisis, the sample is also split into pre-crisis, crisis, and post-crisis periods. Our results suggest that the same type of risk shifting is present in the entire sample and in the pre-crisis and crisis subsamples. We find no evidence of risk shifting after the crisis. Furthermore, holding capital buffers seems to disincentivize risk shifting. This finding appears to provide support for the conservative buffer included in Basel III.

How Country and Safety-Net Characteristics Affect Bank Risk-Shifting

Journal of Financial Services Research, 2003

Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This paper seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk-shifting occurs on average, substantial variation exists in the effectiveness of risk control across countries. We find that the tendency for explicit deposit insurance to exacerbate risk shifting is tempered by incorporating loss-control features such as risk-sensitive premiums, coverage limits, and coinsurance. Introducing explicit deposit insurance has had adverse effects in environments that are low in political and economic freedom and high in corruption.

Changes in Capital and Risk: An Empirical Study of European Banks

In this paper, we investigate the impact of chang es in capital of European banks on their risk-taking behavior from 1992 to 2006. First , we assume that risk changes are different for 3 categories of banks (undercapitalized, adequately c apitalized and highly capitalized). Second, we consider the impact of an increase in each component of regulatory capital (equity, subordinated debt, hybrid capital) on banks' risk changes. We fi nd that, for undercapitalized banks, an increase in capital is associated with a decline in risk. We obtain the opposite result for adequately and highly capitalized banks with, moreover, a higher i ncrease in risk for adequately capitalized banks. Our findings also highlight that the decreas e in risk for undercapitalized banks only holds when banks increase their equity capital. Conversel y, an increase in subordinated debt or hybrid capital is associated with an increase in risk. On the whole, our conclusions support the policy recommendations for ...

Securitization and systematic risk in European banking: Empirical evidence

Using a unique dataset of 592 cash and synthetic securitizations issued by 54 banks from the EU-15 plus Switzerland over the period from 1997 to 2007 this paper provides empirical evidence that credit risk securitization has a positive impact on the increase of European banks' systematic risk. Baseline results hold when comparing estimated beta coefficients with a control group of similar non-securitizing banks. Building several sub-samples we additionally find that (a) the increase in systematic risk is more relevant for larger banks that repeatedly engage in securitization, (b) securitization is more important for small and medium financial institutions, (c) banks have a higher incentive to retain the larger part of credit risk as a quality signal at the beginning of the securitization business in Europe, and (d) the overall risk-shifting effect due to securitization is more distinct when the pre-event systematic risk is low.

Determinants of European bank risk during financial crisis

Cogent Economics & Finance, 2017

This paper examines the determinants of European bank risk-taking during major financial crisis. Using a sample of banks from 26 countries over the period 2005-2015, we examine the nature of the relationship between bank risk, bank characteristics, regulatory, institutional and macroeconomic variables. We use a dynamic panel data modeling structure to capture the potential discrepancies in risk-taking behavior. We subdivide our sample into two sub-samples (East Europe and West Europe countries). We show that macroeconomic and regulatory variables seem to have non-negligible impact on bank risk-taking attitudes. We document that the relationship between bank risk, internal and external factors differs across samples.

Factors Influencing Bank Risk in Europe: Evidence from the Financial Crisis

SSRN Electronic Journal, 2013

In this paper we use a dynamic panel data model to analyze bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the European Union. The selected time span, from 2005 to 2011, considers the impact of the recent financial and economic crisis on the Eurozone banking system. Our results indicate that capitalization, profitability, efficiency and liquidity are negatively and significantly related to bank risk. We also find that less competitive markets, lower interest rates and a context of economic crisis (with falling GDP and rising inflation rates) increase bank risk.

Bank-Insurance Risk Spillovers: Evidence from Europe

The Geneva Papers on Risk and Insurance - Issues and Practice, 2017

We investigate cross-sector financial contagion over the period 2006-2014 for a sample of large European banks and insurers. We use CDS spreads and define contagion as correlation over and above what is explained by fundamental factors. Moreover, we assess the impact of different business models on contagion and the channels through which it spreads. We find that, for insurers, size and investment income raise contagion, while for banks capital adequacy, funding and income diversification are the most relevant factors. Furthermore, leverage is crucial in both sectors. We also provide evidence of the main risk transmission channels: the asset-holding and the guarantee channel for insurers and the additional collateral channel for banks. Our results offer new insight on how credit risk spillovers spread across sectors and call for further regulatory and supervisory effort in understanding if and where cross-industry similarities increase contagion risks.

A Theoretical and Empirical Assessment of Bank Risk-Shifting Behavior

2000

Banks are important for mobilizing savings and then channeling those funds to productive investment projects. While providing these and other services that contribute to economic growth and development, banks take on various types of risks with the expectation that the return they receive will compensate for the risks. This paper theoretically models and empirically tests the extent to which information asymmetry between bank owners and depositors induces riskshifting behavior that allows for higher bank net interest margins. The empirical results support the theoretical hypothesis that the greater the degree of information asymmetry the higher net interest margins base upon a sample of 3,115 banks in 98 countries. JEL Classification: G21, G28, and G15

Maintaining adequate bank capital: An empirical analysis of the supervision of European banks

Journal of Banking & Finance, 2015

During the recent financial crisis, many large banks' losses were absorbed by their sponsoring governments, despite the fact that these banks complied with Basel standards for "adequate" capital. We illustrate a serious supervisory problem by demonstrating that large European banks' reported regulatory capital measures often far exceeded their loss-absorbing capacity during 1997-2011. The cumulative value of government guarantees thereby extended to the largest 25 European banks over that period amounts to nearly € € 1.4 trillion, corresponding to an average of 28.5% of the banks' equity market values. We show that early regulatory attention to declining equity value can substantially reduce the social cost of dealing with bank losses. This research is particularly relevant for European institutions at the present time, as the European Union deals with joint solvency concerns about its banks and its governments. April 17, 2015 Ms. Giacomini thanks the Centre for Applied Research in Finance (CAREFIN) of Bocconi University for providing financial support, and we Maxim Dolinsky for discussions regarding some technical aspects of our calculations.

Risk-Shifting by Federally Insured Commercial Banks

1996

Mispriced and misadministered deposit insurance imparts risk-shifting incentives to U.S. banks. Regulators are expected to monitor and discipline increases in bank risk exposure that would transfer wealth from the FDIC to bank stockholders. This paper assesses the success regulators had in controlling risk-shifting by U.S. banks during 1985-1994. In contrast to single-equation estimates developed from the option model by others, our simultaneous-equation evidence indicates that regulators failed to prevent large U.S, banks from shifting risk to the FDIC. Moreover, at the margin, banks that are undercapitalized shifted risk more effectively than other sample banks.