Bank regulation and risk-taking incentives: An international comparison of bank risk |
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Institution: | 1. Department of Business Administration, Athens University of Economics and Business, 76 Patission Street, GR-10434 Athens, Greece;2. IPAG Lab, IPAG Business School, 184 Boulevard Saint-Germain, FR-75006 Paris, France;3. Department of Banking and Financial Management, University of Piraeus, 80 Karaoli and Dimitriou, GR-18534 Piraeus, Greece |
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Abstract: | This paper uses a panel database of 251 banks in 36 countries to analyze the impact of bank regulation on bank charter value and risk-taking. After controlling for deposit insurance and for the quality of a country's contracting environment, the results indicate that regulatory restrictions increase banks' risk-taking incentives by reducing their charter value. Banks in countries with stricter regulation have a lower charter value, which increases their incentives to follow risky policies. These results corroborate a negative relation between regulatory restrictions and the stability of a banking system. Deposit insurance has a positive influence on bank charter value, mitigating the risk-shifting incentives it creates. This positive influence disappears when we control for the possible endogeneity of deposit insurance. |
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