Do weak supervisory systems encourage bank risk-taking? |
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Authors: | Claudia M Buch Gayle DeLong |
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Institution: | aEberhard-Karls-University, Tübingen, Germany;bBaruch College, City University of New York, United States |
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Abstract: | 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. |
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Keywords: | Government policy and regulation Banks Mergers |
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