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

Too Dispersed to Monitor? Ownership Dispersion, Monitoring, and the Prediction of Bank Distress

“…This indicator reflects the three major determinants of default risk (value of assets, indebtedness, and volatility of assets). Moreover, the default probability is unambiguously decreasing in the DD while it can be increasing in the value of equity when the option value outweighs the charter value (see, e.g., Park and Peristiani 2007). The DD is computed monthly and converted to a quarterly frequency afterwards, using the mean of the monthly DD.…”

“…Another possible shortcoming of market signals is that an increase in banks' share prices may not always indicate a reduction of their risks because shareholders sometimes benefit from higher risk-taking. Indeed, when the failure probability is already high, the option value outweighs the charter value and shareholders therefore prefer risky strategies (see, e.g., Merton 1977;Keeley 1990;Park 1997;Anderson and Fraser 2000;Park and Peristiani 2007). Hence, close to the default point, it is better to use subordinated debt spreads as leading indicators rather than potentially misleading share prices.…”

Modelling the causes and manifestation of bank stress: an example from the financial crisis

“…However, if bank capital falls to low levels, stockholders may become risk-loving, and respond well to more risky strategies. This behaviour has been well documentedsee Park and Peristiani (2007) for a good summary -and implies that shareholders can have interests that are not aligned with those of regulators. During the Savings and Loan crisis, for example, there were many instances of banks engaging in risky behaviour and 'gambling for resurrection' as failure approached.…”

Factors affecting the Risk-taking Behavior of Commercial Banks in Bangladesh

“…The probability of shifting of risk and the costs for the failure of banks to the society are considered as proper justification of regulation of the banking system (Haq & Heaney, 2012). Along with other factors, capital regulation and charter value have impact on risk taking behavior of banks (Park & Peristiani, 2007). Thus we focus on the literature of the determinants of credit and overall risk.…”

“…According to Park and Peristiani (2007), banks like to avoid risk for protecting charter values. Empirical evidence show that there is a positive relation between charter value and bank risk (Saunders & Wilson, 2001).…”