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Financial liberalization and bank risk-taking: International evidence |
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| Institution: | 1. Universidade Católica de Brasília, SGAN 916 Módulo B Avenida W5, Brasília, DF, Brazil;2. Department of Statistics, Purdue University, 250 N. University Street, West Lafayette, IN, USA;3. FGV/EPGE — Escola Brasileira de Economia e Finanças, Graduate School of Economics, Praia de Botafogo 190, Rio de Janeiro, RJ, Brazil;1. Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China;2. School of Economics, LeBow College of Business, Drexel University, Philadelphia, PA, USA;3. Research Institute of Economics and Management, Collaborative Innovation Center of Financial Security, Southwestern University of Finance and Economics, Chengdu, China |
| Abstract: | 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. |
| Keywords: | Financial liberalization Bank risk-taking Banking competition Capital requirements Supervision |
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