Bank Capital and Risk-Taking: Evidence from Misconduct Provisions

Tracey, Belinda; Schnittker, Christian; Sowerbutts, Rhiannon

doi:10.2139/ssrn.3023280

Cited by 5 publications

(6 citation statements)

References 46 publications

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“…This type of analysis is consistent with recent papers that study the effect of bank capital ratio on bank risk levels using loan-level data (Ioannidou, Ongena, and Peydró, 2014;Tracey, Schnittker, and Sowerbutts, 2017;Ohlrogge, 2017).…”

Section: The Effect Of Loan Sizesupporting

confidence: 90%

“…Studying the effect of deterioration in bank capital on a bank's risk-taking motivation challenges the empirical literature due to the difficulty in identifying the causal impact of bank capital shocks on risk taking. A growing literature uses loan-level data to overcome this identification problem (Ioannidou, Ongena, and Peydró, 2014;Tracey, Schnittker, and Sowerbutts, 2017;Ohlrogge, 2017). We address loan-level analysis by assuming that the loans in a bank's portfolio can have different weights.…”

Section: Introductionmentioning

confidence: 99%

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The risk spiral: The effects of bank capital and diversification on risk taking

Lazar

Raviv

2019

International Review of Financial Analysis

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We present a model where bank assets are a portfolio of risky debt claims and analyze stockholders' risk-taking behavior while considering the strategic interaction between debtors and creditors. We find that: (1) as the leverage of a bank increases, risk shifting by borrowers increases, even if their leverage is unchanged (zombie lending). (2) While the literature demonstrates that an increase in the co-movement of a loan portfolio increases the bank's cost of default directly, we find that the increase in co-movement causes an increase in risk shifting that further increases the cost of default (3) Risk shifting decreases with the diversification of a loan portfolio.

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Section: The Effect Of Loan Sizesupporting

confidence: 90%

Section: Introductionmentioning

confidence: 99%

The risk spiral: The effects of bank capital and diversification on risk taking

Lazar

Raviv

2019

International Review of Financial Analysis

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“…Therefore, they are, at least partly, funded by debts that could be withdrawn on demand and, as consequence, exposed to funding liquidity risk. Second, given their exposure to this risk and given that it is costly for banks to raise external nance unexpectedly, banks maintain a stock of liquid assets 4 A conceptually similar strategy using conduct-related provisions is used by Tracey et al (2016). Tracey et al use conduct-related provisions over a later time period (the regime inducing provisions started in 2010).…”

Section: Theorymentioning

confidence: 99%

Capital and Liquidity Interaction in Banking

et al. 2019

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We study how banks' capital level affects the extent to which they engage in liquidity transformation. We first construct a simple model to develop testable hypotheses on this link. Then we test our predictions and establish the causality using a confidential Bank of England dataset that includes arguably exogenous changes in banks' capital requirement add-ons. We find that banks engage in less liquidity transformation when their capital increases, which suggests that capital and liquidity requirements are at least to some extent substitutes. We also find that this substitution is mostly driven by small banks. These results have interesting implications for the optimal joint calibration of capital and liquidity requirements and for the proportionality of prudential regulations.

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“…More recent evidence based on cross-country research shows that financial penalties influence bank risk-taking (Koster and Pelster, 2018). Similar evidence is also manifest in case of UK wherein misconduct provisions are found to lead to a statistically significant decline in bank capital (Tracey et al, 2018). Unlike these studies, our analysis uses data on domestic banks for an extended time span and examine its effect with financial misconduct, holding constant the institutional and macroeconomic environment.…”

Section: Introductionmentioning

confidence: 76%

“…Such effects could lead banks to evergreening loans to hide the true effect of incorrect decision-making, and thereby foment financial misconduct. Using data on US banks during 2009-2016, Tracey et al (2018) provide evidence of a strong link between financial misconduct and bank capital. In terms of magnitudes, a one standard deviation increase in capital raises financial misconduct by close to 10%.…”

Section: Baseline Findingsmentioning

confidence: 97%

Financial misconduct in Indian banks: what matters and what doesn’t?

Ghosh

2020

JRF

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Purpose While several facets of financial misconduct have been explored, one aspect which has largely bypassed the attention of researchers is the factors affecting such misconduct behavior in banks. To investigate this in detail, this paper aims to use disaggregated data on Indian banks for an extended period to understand the factors driving such behavior. Design/methodology/approach Given the longitudinal nature of the data, the author uses fixed effects regression methodology which enables us to control for unobserved characteristics that might affect the dependent variable. Findings The analysis indicates that both bank- and board-specific factors are important in driving financial misconduct, although their importance differs across ownership. In particular, while size and capital are relevant for public banks, liquidity is more of a concern for private banks as compared with their public counterparts. In addition, the relevance of bank boards is important only in case of private banks. These results hold after controlling for the structure of the banking industry and the macroeconomic environment. Originality/value To the best of the author’s knowledge, this is one of the earliest studies for India to carefully examine the interface between financial misconduct and bank behavior in a systematic manner.

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Bank Capital and Risk-Taking: Evidence from Misconduct Provisions

Cited by 5 publications

References 46 publications

The risk spiral: The effects of bank capital and diversification on risk taking

The risk spiral: The effects of bank capital and diversification on risk taking

Capital and Liquidity Interaction in Banking

Financial misconduct in Indian banks: what matters and what doesn’t?

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