Risk shifting in the US banking system: An empirical analysis |
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| Institution: | 1. The Business School, Bangor University, Hen Goleg, College Road, Bangor LL57 2DG, United Kingdom;2. Department of Economics, University of Calabria, Via Pietro Bucci, 87036 Arcavacata, Rende CS, Italy;3. The Business School, Bangor University, Hen Goleg, College Road, Bangor LL57 2DG, United Kingdom;1. International School, East China Jiao Tong University, Nanchang (330013), Jiangxi, China;2. District Department of Education, Gujrat (50700), Punjab, Pakistan;3. School of Management, Huazhong University of Science and Technology, Wuhan (430074), Hubei, China;1. Stern School of Business, New York University, 44 West 4th Street, New York, NY, USA;2. Research Centre, Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt, Germany;3. Finance Department, Frankfurt School of Finance and Management, Adickesallee 32-34, 60322 Frankfurt, Germany;4. Finance Department, Goethe University Frankfurt, House of Finance, Theodor-W.-Adorno-Platz 3, 60323 Frankfurt |
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| Abstract: | 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. |
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| Keywords: | Bank risk Capital buffer Financial structure Moral hazard Risk shifting |
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