Are Bank Shareholders Enemies of Regulators or a Potential Source of Market Discipline?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer --that is, maximize put option value--by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between book value, market value, and a risk measure, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts to dominate charter value. From these estimates, we infer the extent to which the risk-taking incentive prevailed during 1986-92, a period characterized by serious banking problems and financial turmoil. We find that despite the difficult financial environment, shareholders' risk-taking incentive was confined primarily to a small fraction of highly risky banks. Terms of use: Documents in EconStor may

Factors determining European bank risk

“…Regulation includes both direct regulation, including bank capital restrictions, and indirect means including the disclosure of information concerning offbalance sheet exposures. While regulation is important it has also been noted that bank charter value could have a similar effect, ameliorating risk taking within the existing framework (Park and Peristiani, 2007). Thus, we draw on this rich literature in our analysis of the determinants of bank equity risk and credit risk in Europe.…”

“…Banks may actually choose to avoid risk to protect their charter values (Keeley, 1990;Park and Peristiani, 2007). While there is empirical evidence to support a negative relation between bank risk and charter value (Anderson and Fraser, 2000;Konishi and Yasuda, 2004), there is also evidence of a positive relation (Saunders and Wilson, 2001).…”

Consolidation in banking and financial stability in Europe: Empirical evidence

“…Similarly, Keeley (1990) argues that a higher charter or franchise value may deter excessive risk-taking behavior by the bank's management (''charter value hypothesis"). As higher franchise values result in higher opportunity costs when going bankrupt, bank managers or, even more, the bank's shareholders may not accept risky investments that could jeopardize their future profits (Park and Peristiani, 2007). Second, it is assumed that larger banks tend to engage in ''credit rationing" since fewer credit investments of a higher quality will increase the return of the singular investment and hence foster financial soundness (Boot and Thakor, 2000).…”

Market discipline and bank efficiency

“…2 Some, but far from exhaustive examples of market monitoring studies focus on: uninsured large CDs (e.g.,James, 1988, 1990and Ellis and Flannery, 1992, subordinated debt (e.g.,Sironi, 2003 andEvanoff andWall, 2001), and equity shares (e.g.,Park and Peristiani, 2007). Studies using data from Japan includeImai (2006) (deposits), Imai (2007) (subordinated debt),Fueda and Konishi (2007) (deposits), and Spiegel and Yamori (2007) (deposits) Fueda and Konishi (2007).…”