TARP funds distribution and bank loan supply

This paper investigates the determinants of the Troubled Asset Relief Program (TARP) funds distribution to banks and the stimulus effect of TARP investments on credit supply in the economy. Using banks’ political and regulatory connections as instruments, this paper finds that TARP investments increased bank loan supply by an annualized rate of 6.36% for banks with below median Tier 1 capital ratios. This increase is found in all major types of loans and can be translated into $404 billion of additional loans for all TARP banks. On average, TARP banks employed about one-third of their TARP capital to support new loans and kept the rest to strengthen their balance sheets. Furthermore, there is little evidence that loans made by TARP banks had lower quality than those by non-TARP banks. In sum, this paper shows a positive stimulus effect of TARP on credit supply during the 2008–2009 financial crisis.     

National culture and bank risk-taking

We investigate the relation between national cultural values and bank risk. Despite the rigid transnational regulatory oversight of systemic European banks, we find evidence of an economically significant association between cultural values and domestic bank risk. Specifically, we report a positive (negative) association between the cultural values of individualism and hierarchy (trust) and domestic bank risk-taking. Consistent with our predictions, this relation weakened during the recent financial crisis and does not hold for global banks, regardless of the period under investigation. Our findings are robust to endogeneity tests that mitigate concerns regarding reverse causality and confounding effects affecting our conclusions.     

Interest rates and bank risk-taking

A recent line of research views the low interest-rate environment of the early to mid 2000s as an element that triggered increased risk-taking appetite of banks in search for yield. This paper uses approximately 18000 annual observations on euro area banks over the period 2001-2008 and presents strong empirical evidence that low-interest rates indeed increase bank risk-taking substantially. This result is robust across a number of different specifications that account, inter alia, for the potential endogeneity of interest rates and/or the dynamics of bank risk. Notably, among the banks of the large euro area countries this effect is less pronounced for French institutions, which held on average a relatively low level of risk assets. Finally, the distributional effects of interest rates on bank risk-taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off-balance sheet items.     

US government TARP bailout and bank lottery behavior

Considerable debate surrounds how the US government's TARP bailout intervention has affected the risk-taking and moral hazard behavior of U.S. banks around the global financial crisis. We examine this issue with a focus on lottery behavior introducing MAX/MIN as a new measure of lotteryness in banking to capture the loss protection from bank bailout guarantees. We find that the TARP bailout increased the likelihood of bank lotteryness and risk shifting. Lottery-like bank equities are riskier after TARP and exhibit fatter right to left tails. A consistent pattern of risk taking and lottery behavior extends both before and after the 2008–2009 crisis, engulfing the largest systemic banks (SIFIs). While confirming that lottery-like bank equities have lower short-term return, we find they exhibit better cumulative long-term return performance. Our findings have important policy implications regarding government intervention in banking crises.     

Countercyclical prudential buffers and bank risk-taking

We investigate the effects of countercyclical prudential buffers on bank risk-taking. We exploit the introduction of dynamic loan loss provisioning in Spain, mandating that banks use historical average loss rates in their estimation of loan loss provisions. We find that dynamic loan loss provisioning is associated with reductions in timely loan loss provisioning. Banks that previously recognized loan losses in a timely fashion exhibit the greatest reductions in timeliness and consequently extend loans to riskier borrowers with lower accounting quality. Our results have policy implications for the debate on the use of financial reporting requirements in mitigating capital pro-cyclicality.     

Political institutions and bank risk-taking behavior

This paper examines the impact of political institutions on bank risk-taking behavior. Using an international sample of banks from 98 countries over the period 1998–2007, I document that sound political institutions stimulate higher bank risk-taking. This is consistent with the hypotheses that better political institutions increase banks’ risk by boosting the credit market competition from alternative sources of finance and generating the moral hazard problems due to the expectation of government bailouts in worst economic conditions. While it is contrary to the hypotheses that better political institutions decrease banks’ risk by lowering the government expropriation risk and the information asymmetries between banks and borrowers. The results are robust to a number of sensitivity tests, including alternative proxies of bank risk-taking and political institutions, cross-sectional bank- and country-level regressions, endogeneity concerns of political institutions, country income levels, explicit deposit insurance schemes and sample extension from 1998 to 2014. I also examine the interdependence between political and legal institutions and find that political and legal institutions complement each other to influence bank risk-taking behavior.     

Financial statement comparability and bank risk-taking

This study examines the relationship between financial statement comparability and bank risk-taking. Our analysis of a sample of publicly listed U.S. banks over the 1994–2019 period shows that banks with more comparable financial statements are related to significantly less risk-taking. We also find that the negative relationship between comparability and risk-taking is more pronounced for firms with more severe moral hazard and agency problems. Our documented findings are robust across alternative measures of comparability and risk-taking and considering change analysis, after controlling for strength of corporate governance and using propensity score matching and two-stage least squares estimation to address endogeneity concerns. Our analysis also shows that the relationship between financial statement comparability and bank risk-taking is stronger for smaller banks than for larger banks. Overall, this study provides unique insights into the role of financial statement comparability in curbing risk-taking in the banking sector.     

Chair-CEO generation gap and bank risk-taking

Poor bank governance has disastrous consequences for economies as the 2007–2009 financial crisis has shown. In the aftermath, board diversity is identified as an effective mechanism to enhance bank governance. Diversity, creating cognitive conflict between board members, is expected to enhance board's independence of thought to better perform monitoring and advising functions. Age is a key demographic measure and age dissimilarity between the chair and the CEO in non-financial firms leads to better economic outcomes (Goergen, Limbach, & Scholz, 2015). In this paper, we examine whether chair-CEO age dissimilarity can mitigate banks' excessive risk-taking behaviour. Using a unique sample of 100 listed banks in Europe between 2005 and 2014, we find that age difference between the chair and the CEO reduces bank risk-taking. A chair-CEO generational gap –defined as a minimum of 20 years' age difference– has a larger impact in reducing risk-taking.     

Institutional investor horizon and bank risk-taking

We test the effect of short-term versus long-term institutional shareholding –so-called investor horizon– on bank risk-taking. We find that in contrast to banks dominated by short-term shareholders, banks with greater long-term shareholding are associated with lower risk, better stock performance, and conservative business and compensation policies. Our results imply that bank regulators should be more vigilant over the actions of banks that heavily rely on short-term shareholding.     

The implications of TARP: Evidence from bank performance and CEO pension benefits

This study examines the effect of compensation restrictions introduced by the Troubled Assets Relief Program (TARP) of 2008 on the performance of banks and their compensation structures. It documents significant performance improvement among TARP banks that experienced Chief Executive Officer (CEO) resignations after their banks accepted TARP funds. The improvement is most significant in the year following CEO resignation. In addition, TARP banks that kept their CEOs show a significant increase in CEO pensions post-TARP. TARP banks that did not experience CEO resignations, thus, appear to substitute pension increases for their CEOs to mitigate the TARP-induced decrease in conventional forms of compensation. Further analysis on all banks without CEO resignations shows that TARP banks have significantly higher increase in pension benefits post 2009 than banks that chose to decline TARP funds. The evidence shows that increased pension arrangements play a significant role in CEOs’ decisions to remain in their roles despite the constraints imposed by TARP.     

The impact of off-balance-sheet regulations on bank risk-taking: Evidence from China

The release of new asset management rules has played a positive role in regulating the asset management business of financial institutions, preventing and controlling financial risk. It has also had an important impact on the management of banks’ off-balance-sheet (OBS) innovation. This paper uses unbalanced panel data on 75 commercial banks in China from 2007 to 2017 and combines a theoretical and an empirical model to study the development of bank OBS innovation and bank risk taking from the perspective of new asset management regulations. The analysis finds (1) the rapid development of OBS innovation will increase bank risk taking and (2) the solution to the problem of rigid payment is conducive to reducing the risk taken by Chinese commercial banks when providing OBS innovation.     

Financial networks,bank efficiency and risk-taking

Networks with a core–periphery topology are found in many financial systems across different jurisdictions. Though the theoretical and structural aspects of core–periphery networks are clear, the consequences that core–periphery structures bring for banking efficiency stand as an open question. We address this gap in the literature by providing insights as to how the structure of financial networks can affect bank efficiency. We find that core–periphery structures are cost efficient for banks, which is a characteristic that encourages the participation of banks in financial networks. On the downside, we also show that core–periphery structures are risk-taking inefficient, because they imply higher systemic risk levels in the financial system. In this way, regulators should be aware of the excessive risk inefficiency that arises in the financial system due to individual decisions made by banks in the network.     

Do weak supervisory systems encourage bank risk-taking?

Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.     

Strong boards,CEO power and bank risk-taking

This study examines the relevance of bank board structure on bank risk-taking. Using a sample of 212 large US bank holding companies over 1997–2004 (1534 observations), this study finds that strong bank boards (boards reflecting more of bank shareholders interest) particularly small and less restrictive boards positively affect bank risk-taking. In contrast, CEO power (CEO’s ability to control board decision) negatively affects bank risk-taking. These results are consistent with the bank contracting environment and robust to several proxies for bank risk-takings and different estimation techniques.     

Capital regulation and bank risk-taking: A note

This paper examines theoretically the effects of more stringent capital regulation on bank asset portfolio risk. The analysis shows that, for a value-maximizing bank, incentives to increase asset risk decline as its capital increases. Thus, as long as regulatory efforts to contain asset risk and size are not reduced, more stringent capital regulation unambiguously reduces the expected liability of the deposit insurance system.     

Financial liberalization and bank risk-taking: International evidence

This paper analyzes the channels through which financial liberalization affects bank risk-taking in an international sample of 4333 banks in 83 countries. Our results indicate that financial liberalization increases bank risk-taking in both developed and developing countries but through different channels. Financial liberalization promotes stronger bank competition that increases risk-taking incentives in developed countries, whereas in developing countries it increases bank risk by expanding opportunities to take risk. Capital requirements help reduce the negative impact of financial liberalization on financial stability in both developed and developing countries. However, official supervision and financial transparency are only effective in developing countries.     

The effect of prior outcomes on gender risk-taking differences

This study proposed that men are more likely to take greater risk after a win (‘house money’ effect), while women are more likely to take greater risk after a loss (‘escalation of commitment’ effect). These effects are, however, moderated by prior experiences in risk-taking and role characteristics. Three distinct groups of 30 subjects (total?=?90) each were solicited to play an experimental betting game. The subjects were categorized into risk providers (RP), risk customers (RC), and non-risk customers (NRC). RP are represented by casino executives, RC by leisure life-time casino gamblers, and NRC by non-casino gamblers. On average, RC group was found to take most betting risk. Male RCs were more likely to bet more after a win, while female RCs were more likely to bet more after a loss. NRCs, irrespective of gender, were more likely to bet more after a loss. There were no gender risk-taking differences in prior outcomes in the RP group.     

Post-privatization state ownership and bank risk-taking: Cross-country evidence

We examine the relation between state residual ownership and bank risk-taking for privatized banks from 45 countries. Applying propensity score matching, we find that privatized banks tend to exhibit higher levels of risk-taking post-privatization than their publicly listed non-privatized counterparts. Moreover, partially privatized banks exhibit higher levels of risk-taking than fully privatized banks. We also observe a positive and significant relation between the level of residual state ownership and risk-taking. These findings are consistent with the distorted objectives associated with government control, as suggested by the political benefits of control, and with the soft budget constraint views of state ownership. The distortion can be mitigated by the quality of a country's institutional and regulatory environments. Finally, our results show that the effect of state ownership on risk-taking is more pronounced in countries with a higher dominance of state-owned enterprises, and it was more prevalent during the global financial crisis.     

Muslim CEOs and bank risk-taking: Evidence from Indonesia

This study investigates the relationship between Muslim CEOs and bank risk-taking based on Indonesian banks from 2010 to 2017. We find that there is no significant difference in risk-taking among Indonesian banks based on whether the banks have Muslim CEOs or not. However, we find that only state-owned banks with Muslim CEOs display significantly low risk-taking. We further find that foreign-owned banks with Muslim CEOs display a significant low risk-taking only in the presence of Muslim-dominated boards. We show that Muslims must be in the majority on 2-tier boards (board of directors and board of commissioners) to significantly influence Muslim CEOs' risk-taking. In addition, we find no related evidence from family-owned firms. Further analysis reveals that banks with a low concentration of ultimate ownership indicate Muslim CEOs' low risk-taking behaviour, and vice versa.     

National culture and bank risk-taking: Contradictory case of individualism

Previous studies have reported a positive association between the cultural dimension of individualism and bank risk-taking. We hypothesize that this association is likely to be confounded by the omitted effects of corporate governance. Given the indicative evidence that such confounders are less likely to affect listed banks, we test this association for a global sample of 467 commercial listed banks from 56 countries. Our results show that the association between individualism and bank risk-taking is negative. This result is consistent with the cushioning hypothesis, the idea that people take on more risk in collectivist societies because they expect to receive help from the members of their social networks in the case of failure.