Risk-taking behavior of banks under regulation

Park, Sangkyun

doi:10.1016/s0378-4266(96)00050-7

Cited by 62 publications

(34 citation statements)

References 13 publications

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“…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.…”

Section: Introduction Literature Review and Theoretical Foundationsmentioning

confidence: 99%

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

Auvray¹,

Brossard²

2012

J of Money Credit Banking

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Abstract:This paper conducts an empirical assessment of the theories stating that ownership concentration improves the quality of shareholders' monitoring. In contrast with other studies, we do not use regressions of risk/performance on ownership concentration. Instead, we build an early warning model of bank distress that includes a leading indicator derived from banks' share price, the Merton-KMV distance to default (DD). The significance of this indicator depends on the efficacy of shareholders' monitoring. On a sample of European banks, we show that the predictive power of the DD is satisfactory only when banks' shareholding is characterized by the presence of blockholders.

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Section: Introduction Literature Review and Theoretical Foundationsmentioning

confidence: 99%

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

Auvray¹,

Brossard²

2012

J of Money Credit Banking

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“…In the model, the portfolio choice and the capital ratio determine the shareholders' wealth by affecting the put option value and the charter value. In many ways, our framework is very similar to theoretical models developed by Marcus (1984), Keeley (1990), Ritchken et al (1993), andPark (1997). Nevertheless, this section has two useful purposes.…”

Section: Effects Of Failure Risk On Shareholders' Wealthmentioning

confidence: 84%

“…Several studies of moral hazard have shown that bank shareholders are also responsive to the bank's charter value or intangible capital (e.g., Marcus (1984), Keeley (1990), Ritchken et al (1993), and Park (1997)). In the event of failure, shareholders have to forfeit charter value.…”

Section: Introductionmentioning

confidence: 99%

Are bank shareholders enemies of regulators or a potential source of market discipline?

Park

Peristiani

2007

Journal of Banking & Finance

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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

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“…Stolz (2007) [5] Although many scholars support the negative relationship between franchise value and bank risk behavior, some scholars think that there is a positive correlation between franchise value and bank risk. Park (1997) [7], Fisher and Gueyie (2001) [8] use different sample data to prove that there is a positive correlation between franchise value and bank risk.…”

Section: Foreign Research Literaturementioning

confidence: 99%

Effects of Deposit Insurance on Self-Discipline of Bank Franchise Value

Zhao¹

2017

AJIBM

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Foreign research has shown that the bank franchise value is the important mechanism of the bank's risk self-discipline. However, the relationship between the franchise value and the risk behavior of our bank must be based on our special financial background. Before the implementation of explicit deposit insurance system in China, there has been an implicit deposit insurance system guaranteed by the government. The traditional literature suggests that the implicit deposit insurance system provides a strong guarantee for commercial banks, which may weaken the risk discipline effect of the bank's franchise value, and the reasonable explicit deposit insurance system is superior to the implicit deposit insurance system. In the financial context of the explicit deposit insurance system, the self-discipline effect of the franchise value will be repaired. Based on the reality of establishing an explicit deposit insurance system in China, this paper uses the Tobin Q value to measure the franchise value of 16 listed banks in China. The relationship between the franchise value and risk of bank before and after the introduction of explicit deposit insurance is studied by using panel data model. The results show that before the implementation of the explicit deposit insurance system, the self-discipline effect of the franchise value is completely ineffective in the context of the government-guaranteed implicit deposit insurance system. The cross-item coefficient of the explicit deposit insurance system and the franchise value is significantly negative. It shows that the implementation of the explicit deposit insurance system has played a role in restoring the self-discipline effect of the bank's franchise value.

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Risk-taking behavior of banks under regulation

Cited by 62 publications

References 13 publications

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

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

Are bank shareholders enemies of regulators or a potential source of market discipline?

Effects of Deposit Insurance on Self-Discipline of Bank Franchise Value

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