Government support, regulation, and risk taking in the banking sector

Brandão-Marques, Luis; Correa, Ricardo; Sapriza, Horacio

doi:10.1016/j.jbankfin.2018.01.008

Cited by 70 publications

(55 citation statements)

References 24 publications

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“…Given that these buffers create an exogenous incentive for banks to decrease their complexity levels, we explore this regulatory shock in an instrumental variables setting. We examine how bank complexity affects banks' risk taking behaviors by exploring an exogenous shock coming from a regulatory tool that targets the complexity of banks, thus exploring the idea that regulation might have an important role in shaping the link between complexity and risk in banking (Laeven and Levine 2009;DeYoung et al 2013;Brandao-Marques et al 2018).…”

Section: Complexity Risk and Regulation: An Instrumental Variables Amentioning

confidence: 99%

Banks’ Complexity and Risk: Agency Problems and Diversification Benefits

Bonfim

Félix

2020

SSRN Journal

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Bank complexity is often associated with risk, due to moral hazard and agency problems. At the same time, complexity may be linked to diversification and scale economies, thus leading to less risk. In this paper, we provide empirical evidence on the relationship between bank complexity and risk-taking. We find a positive relationship between geographical complexity and bank risk. Banks that operate in more countries, both through banks and non-banks, have riskier balance sheets and more non-performing loans. Further, banks that operate in Africa have higher risk levels due to larger volatility of returns. The link between structural complexity and bank risk is weaker, but generally negative. Our results suggest that moral hazard and agency problems may be more acute when banks operate in many geographies and in emerging market economies. In contrast, the results are consistent with diversification and scale benefits arising from operating in more business areas.

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Section: Complexity Risk and Regulation: An Instrumental Variables Amentioning

confidence: 99%

Banks’ Complexity and Risk: Agency Problems and Diversification Benefits

Bonfim

Félix

2020

SSRN Journal

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“…While the framework is rich enough to deliver multiple predictions, we focus on the predictions that lend themselves most readily to empirical investigation and, at the same time, have not been previously evaluated. For this reason, for instance, we do not study the effects of the guarantees on bank risk taking as such, which are the focus of several recent papers (see, e.g., Brandao-Marques et al, 2018). Instead, we concentrate on the direct effects of government guarantees on bank risk premiums, which is the most novel aspect of our theoretical analysis.…”

Section: Testable Predictionsmentioning

confidence: 99%

“…On the one hand, based on the model, this could be the case as in the presence of risky guarantees the effect through risk taking is more ambiguous. On the other hand, the effect of government support on charter value could also be empirically relevant, in that it is not clear cut that stronger guarantees induce banks to take on more risk (e.g., see Brandao-Marques et al, 2018), which makes the indirect effect of the guarantee weaker.…”

Section: Egs Factor Vs Level and Security Factorsmentioning

confidence: 99%

“…On the other hand, by reducing bank funding costs, government support should increase the charter value of the bank, and as a result diminish the bank's incentive to take on risk. While the empirical evidence is mixed for high EGS banks, outright publicly owned banks, as well as the competitors of banks benefiting from EGS, seem to take on risk (Gropp et al, 2011;Altavilla et al, 2017;Brandao-Marques et al, 2018). In our theoretical framework, we model risk taking à la Bester and Hellwig (1987) to account for potential indirect effects of the guarantee operating through this separate channel, although the main focus is on the direct effects of the guarantee on bank risk premiums.…”

Section: Introductionmentioning

confidence: 99%

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Risky bank guarantees

Mäkinen

Sarno

Zinna

2020

Journal of Financial Economics

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Applying standard portfolio-sort techniques to bank asset returns for 15 countries from 2004 to 2018, we uncover a risk premium associated with implicit government guarantees. This risk premium is intimately tied to sovereign risk, suggesting that guaranteed banks, defined as those of particular importance to the national economy, inherit the risk of the guarantor. Indeed, this premium does not exist in safe-haven countries. We rationalize these findings with a model in which implicit government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy.

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“…This study contributes to the DEA literature and will provide further empirical evidence to test the Simar and Wilson (2007) methodology in a new context of Asian and developing countries. Following Laeven and Levine (2009) and Brandao-Marques, Correa, and Sapriza (2018), the study uses control variables (i.e., size, return on assets and GDP growth) to check independently the effect of the stated variables (market concentration and risks) on the overall efficiency of banks.…”

Section: Introductionmentioning

confidence: 99%

Market Concentration, Risk-taking, and Efficiency of Commercial Banks in Pakistan: An Application of the Two-Stage Double Bootstrap DEA

Khan¹,

Ali²,

Khan³

2018

BER

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Efficiency analysis is a vital part of prudent management practices across the banking industry, yet there is only sparse literature examining bank efficiency, especially in Asian developing countries and using a comprehensive methodology. This study aims to analyze bank efficiency in a South Asian developing country, Pakistan, for the period 2007 to 2014. Borrowing a technique from Simar and Wilson (2007), this study applies two-stage data envelopment analysis (DEA) with double bootstrapping. Our results reveal that private banks are more technically efficient than government banks; conventional commercial banks precede Islamic commercial banks in efficiency, and large banks are more technically efficient than small and medium-size banks. Moreover, the results indicate that market concentration, capital risk, credit risk, and liquidity risk have significant effects on the overall efficiency of banks. This study provides an important opportunity to advance the understanding of bank efficiency, market concentration, and risk complications in developing countries and gives insightful directions to researchers and financial institutions.

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Government support, regulation, and risk taking in the banking sector

Cited by 70 publications

References 24 publications

Banks’ Complexity and Risk: Agency Problems and Diversification Benefits

Banks’ Complexity and Risk: Agency Problems and Diversification Benefits

Risky bank guarantees

Market Concentration, Risk-taking, and Efficiency of Commercial Banks in Pakistan: An Application of the Two-Stage Double Bootstrap DEA

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